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China Joins Rest of the World in Reserve Monetary Easing Measures

In an effort to increase loan supplies, China has adopted monetary easing measures by cutting the amount of reserve cash that banks are required to set aside.

China Joins Rest of the World in Reserve Monetary Easing Measures

This move comes after massive capital outflows and sluggish production signal a deepening slowdown in the world’s second largest economy.

The People’s Bank of China announced that it would be easing monetary policy by reducing the reserve ratio by 50 basis points. This would drop the required reserve level by 19.5%, with small business and rural lenders allowed smaller reserve ratios.

 

 

China easing monetary policy

Over a dozen central banks in the world have embarked on a monetary easing policy against a background of falling commodity prices. The PBOC has jumped onto the bandwagon in an effort to support growth and productivity.

Premier Li Keqiang had undermined concerns about a weakening Chinese economy. However, a move to adopt monetary easing measures is seen by many as a sign that the imposed slowdown has not yet reached its lowest possible point.

Edwin Truman, a former official of the Federal Reserve and U.S. Treasury official said, “A lot of the world is easing monetary policy against low inflation because of the relatively slow growth and also due to tumbling oil prices.” The latest China monetary policy is largely in alignment with this general global pattern.

 

 

Deeper reserve cuts

Shen Jianguang, chief Asia economist at Mizuho Securities in Hong Kong said that China could go ahead with at least four more reserve ratio cuts in 2015 against a background of further slowdown in economic fundamentals. He observed that the latest China quantitative easing was largely a result of large capital outflows, weak production in factories and in the service industries, a high risk of deflation and restrictions on stock-market speculation.

The PBOC further announced a further reserve cut of 0.5% for commercial banks in the cities and rural commercial banks that lend to small businesses, a move that is seen as encouraging economic growth through small businesses and the domestic agricultural economy.

The Bank is expected to cautiously implement the monetary easing policy, oversee stable growth, and promote steady economic growth while also offering social finance.

Peter Rosenstreich, head of market strategy at Swissquote Bank SA in Switzerland pointed out that the China monetary easing measures are indicative of China’s offensive outlook. He said, “2015 will be a year where PBOC and the Chinese government will take a more aggressive approach in an attempt to support the Yuan. This strategy should create a positive outlook for commodity prices and Asia currencies.

Chinese leaders are expected to set a growth target of about 7 percent, a downward move from 7.5% in 2014. A move toward reserve ratio cuts is suggestive of the country’s shift toward policies that support growth. However, such policies may increase the level of debt given the unprecedented lending in the country between 2009 and 2013 that was a cause of a banking crisis in other countries.

China is able to cut interest rates given that the cost of borrowing is still high in spite of low rates of inflation. The cuts are seen as paving way for better business sentiments and improved market conditions.

 

 

Market Impact

·        China’s quantitative easing measures saw a surge in futures on the FTSE China A50 index in Singapore. Contracts on the Hang Seng Index also increased—a trend that may continue for the long term as the monetary easing measures take hold.

·        For the stock market to have a long-term positive reaction, the PBOC would have to continue with its easing policies in both Q1 and Q2 of 2015.

·        However, given the financial uncertainties in China and abroad, investors would need to continue trading cautiously ahead of the Chinese Lunar New Year holiday.

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