China: Monetary easing in perspective – ABN AMRO

According to Arjen van Dijkhuizen, senior economist at ABN AMRO, the recent monetary easing steps in China are of a smaller scale than the measures taken during the global financial crisis and the episode of China wobbles in 2015-16.

Key Quotes

“The PBOC has left its benchmark policy rate on hold this time, compared to a reduction by 216 bps in 2008-09 and 165 bps in 2014-16. The 350 bp reduction in RRRs for large banks in 2018-19 so far is similar to the 300 bp cuts in 2015-16, but we should add that these measures are partly needed to sterilise the liquidity drain stemming from smaller inflows through the capital account. Hence, these RRR cuts are needed to safeguard liquidity in the banking system and therefore cannot be purely seen as a stimulus measure. That said, the PBoC’s shift has caused a general easing of monetary and lending conditions.”

“The 7-day interbank repo rate has fallen again since mid-2018 after a rise in 2016-17 (although the fall in interbank rates in 2015 was sharper). Last but not least, the PBoC also allowed a relatively sharp CNY depreciation versus USD last year (around 10% in April-October). That partly offset the impact of US import tariffs, although the depreciation was triggered by market forces. Meanwhile, CNY has stabilised in the autumn of 2018 and has regained a bit since the US-China truce agreed by Trump and Xi on 1 December.”