Friday, July 20, 2018

THE TRUMP EFFECT: Chinese Monetary Authorities Panic

The People's Bank of China hedquarters
China’s central bank, The People's Bank of China is in panic mode. The PBOC - three weeks after its latest RRR cut - announced further easing measures, early Thursday, including the introduction of incentives that will boost the liquidity of commercial banks, helping them to expand lending and increase investment in bonds issued by corporates and other entities.

In order to make sure that Chinese banks and financial institutions have ample liquidity, notes Zero Hedge,  the PBOC appears to have engaged in quasi QE - using monetary policy instruments such as its medium term loan facility (MLF) - to support the local bond market and banks, especially those that have invested in bonds rated AA+ and below. 

Effectively, China will directly fund banks with ultra cheap liquidity, with one simple instruction: "increase bank lending and bond purchases." And since, Zero Hedge notes, all Chinese banks are essentially state owned, what Beijing is doing is launching a form of stealthy QE, only one where it is not the central bank, but the country's various commercial banks that do the purchases... using central bank liquidity.

Commenting on the move by the Chinese central bank, Goldman said that this is a sign that the government is stepping up its loosening measures given the weakness in May and June TSF data, lukewarm June activity data, weak asset market performance, and rising trade tensions.
The catalyst for this quasi QE? Trump's unexpected trade war escalation:
In our view, the government was likely surprised by the timing of the USD200bn tariff announcement by the US and is taking time to come up with a concrete response. While the direct hit to aggregate demand growth from weaker exports is likely to be fairly limited (still 0.5pp or less for the total USD250bn in goods related tariffs in three rounds: USD34bn+USD16bn at 25% and USD200bn at 10%) and can be relatively easily offset by policy loosening, the risk of further escalation and the potential effects other than the hit to export demand (e.g., negative impact on investment due to uncertainty) are significant and much harder to quantify.

-RW