China’s most recent efforts to ease policy, which started in mid-2018, were subdued. The People’s Bank of China (PBOC) ensured a more targeted approach would be taken relative to the debt and infrastructure binge they used in 2009. This held true through the end of the year, as China ramped up efforts via government bond sales and indicated there may be tax cuts to follow. In 2019, Chinese policies have continued to loosen. The PBOC cut banks’ reserve requirements for the fifth time in a year and a plan to provide roughly 2 trillion yuan (227bn GBP) in tax cuts was announced.
This marks a notable shift, as the use of fiscal policy is a big step for an economy that has been heavily reliant on monetary policy over the past decade. This new fiscal approach intends to soften the blow from the loss of stimulus from non-bank lending, however, it remains to be seen if this approach will be enough to reverse the rate of economic slowdown.
In recent weeks, there has been a new wave of optimism surrounding China, as several indicators such as the Purchasing Managers’ Index (PMI) and M1 (total amount of currency in circulation and held in bank’s checking accounts) posted turnarounds. While this is a step in the right direction, it is still too early to tell if Chinese economic growth is turning a corner, and the renewed confidence brought on from positive surprises in economic data may be overdone.
Additionally, it is important to dissect Chinese data as it is released. Having a large informal economy requires China to rely on estimates and surveys for much of its data. This in turn requires analysing and corroborating data to avoid relying on indicators that may not tell the whole story.
The underlying trend of slowing growth has not yet changed. China has ruled out a “flood” of stimulus as used in the past, but it remains to be seen if their latest effort, using a more targeted approach, will be enough to truly rebound their economy. One major issue remains; the success of accommodative policy is dependent on Chinese companies and consumers electing to use it. If companies and consumers lack confidence in the economic recovery, will there be any demand to use the cheap bank lending being offered?