International

China Uses Monetary Policy To Cure China’s Economic, Viral Ills

Monetary Policy To Cure China’s Economic Ills?

Can monetary policy cure the ills of an economic slowdown caused by the Coronavirus?

China may be about to find out.

In a series of actions aimed at boosting liquidity (and, by extension, economic stability), China’s central bank has pumped money into the country’s financial system, which had been slowing markedly even before the pandemic.

In one example, as reported by Xihuanet.com, the People’s Bank of China (PBOC) used a mechanism known as “reverse repos” to bring 700 billion yuan (about $129 billion) into banking activities. The move offset billions of yuan in reverse repos that matured last week, so the net impact was, effectively, to keep an even keel among commercial banks. The mechanics are such that the central bank buys securities from commercial banks through a bidding process – and, as Bloomberg reported, the goal is to keep liquidity at a “sufficient level.”

Beyond those actions, the PBOC stepped up to give commercial lenders a bit more funding, and in turn reduced the interest rate charged on that funding. The tally came to 200 billion yuan, which translates to $29 billion USD equivalent in one-year medium-term loans, while the interest rate was cut by 10 basis points to 3.15 percent.

According to Zhou Guannan, an analyst at Huachuang Securities Co., as quoted by the newswire, the interest rate reduction is “in line with expectations, while the injection amount is relatively small, as interbank funding is sufficient after the new year.”

Though incremental and relatively small in scale, the PBOC moves indicate that commercial lending requires at least some support to keep the economy growing, even at a dramatically reduced rate, amid an outbreak that has seen more than 64,000 individuals infected worldwide.

News came on Tuesday (Feb. 18) that China may introduce a target growth rate of “around 6 percent,” where once that rate had been about 6.1 percent. That target was slated to be announced at the National People’s Congress scheduled for early March, which is now delayed.

It should be noted that the rate cut usually has a ripple effect, because the prime rate gets lowered, which in turn lowers the rate charged on household loans. That’s an important ripple effect, because it’s meant to spur spending. But as has been widely reported, Chinese consumers are already pulling back on retail spending

For now, the impact is being felt among firms that include luxury retailers such as Burberry’s (which has said sales will be impacted in the region amid the closure of 24 stores) and, of course, tech giants such as Apple. It’s hard to spend money when the storefronts are shuttered, supply chains are sputtering and even eCommerce is likely to take a hit.

In the meantime, the virus has led to the quarantine of 50 million people across the mainland, and travel to more than 70 countries has been truncated. Jefferies, the sell-side firm, as quoted in The New York Times, has estimated that Chinese dollars constituted 40 percent of luxury goods last year, which totaled $305 billion. China’s retail spending in recent months has marked about 8 percent growth in recent months, but had topped double digits as recently as 2018.

The slowdown is palpable, and the headwinds are likely to get more pronounced. In the meantime, PBOC’s incremental steps speak to a delicate balancing act. Monetary policy needs to be measured, lest it strike fear into the very audiences it is designed to soothe – in this case, banks and consumers. No easy fix is in sight.

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