The People’s Bank of China in Action

Tracking China’s policy response

Last week, my esteemed colleagues Wadsworth Sykes and Alexander Pelle penned a prescient article on the outlook for the Chinese economy. Sadly (😉) I found little to object to but felt myself wanting more (if only they could do this more often!).

Macrobond moment: One thing that I really like, with my colleagues spread across the world and different time zones is that I can just go directly to the company or department account to update, open up and manipulate (don’t forget to make a copy!) their best charts without having to hassle, or wait for, my co-workers to do it for me!

Monetary Policy

The guys have a couple of charts that touch on China’s economic policies, and I thought – not least due to their discussion on a possibly strong impact from the outbreak of the Wuhan Corona virus – that tracking any short-term policy responses would be an interesting expansion of their post. If nothing else, due to the ongoing restructuring of (monetary) stabilization policy tools, there are some things that I have found particularly interesting.

What struck me as surprising with the data on central bank market operations was that the People’s bank of China, PBoC, has apparently been adding liquidity even as the trade war weakened in intensity and Chinese data stabilized. (That said, I don’t think you should read too much into the seasonal (!) upticks of liquidity going into the Chinese New Year celebrations.)

Of course, as the PBoC has already announced they will add some CNY bn 1.2 of liquidity (and cut repo rates) to counteract any negative impact on the economy from the spread of the Corona virus, we can be certain that the chart above will look very different when January and February numbers are released. Fact is, you can already see the reverse repo operations (and rates) here:

And the impact on market interest rates from the PBoC’s measures are also evident, with stark drops in swap yields, corporate bond yields etc.

Of course, the drop in market and corporate funding rates is not only related to additional OMOs (at lower rates) but also related to the fact that the PBoC lowered banks’ Required Reserves Ratio (RRR) recently.

That said, under the ‘new’ monetary policy regime – where the PBoC aim to connect market interest rates tighter to the policy rates (mainly to the seven-day repo rate discussed above, and the rate on the Medium-term Lending Facility, MLF), we cannot yet see an impact in published data. However, as data on “IBOR-rates” come in, these should drop closer to the PBoC 7d repo rate over the coming weeks/months.

Note: the CHIBOR and fixing rates in the graph above are market rates, but they should move towards the PBoC 7-days repo rate (unless there is bank funding stress). Similarly, the PBoC are instructing banks to use the MLF-rate (plus a spread), the Prime Loan Rates (PLR), as a reference rate for pricing loans to corporates and household mortgages.

Fiscal Policy

Now, before turning to fiscal policy, I would like to train your eyes on the chart labelled China Bonds Oustanding from Waddy’s and Alex’s post. There, as you can see, it is clear that it’s primarily ‘Local government’ that has enacted fiscal policy in the wake of the Global Financial Crisis. Since it is possible to extract some very timely data on local government bond issuances I have found what seems to be a very apparent fiscal response to the outbreak (for good measure I have added the equivalent – but less timely – data on central government bond issuance as well).

As China’s leader, Xi Jinping, is seen to (eventually) have taken command of the official response(s) to the outbreak, it is obvious that no expenses will be spared to overcome the situation, with the 8-day construction of an emergency hospital as a glaring example.

On a somewhat longer time frame, especially if this kind of stimuli would continue, this will show up elsewhere. For instance, within a couple of months, we should see a major reversal of the currently benign fiscal trends.

Macrobond moment: The data underlying these two charts are plagued with (some of) the omni-present quirks when using China data and that make any transformations [and analysis] a nightmare. Thanks to the powerful formula language in MB, you can try a number of remedies, such as replacing missing data with your own estimated data. Here I have used those capabilities to be able to apply a more rigorous seasonal adjustment process.

Such developments would, of course, make China’s fiscal situation even more difficult, as it seems it’s been extremely difficult for policy makers to veer the Chinese economy off its post-GFC credit abuse. Admittedly, buffers in the form of low central government indebtedness and a large FX-reserve, are formidable. But historical experiences with large and rapid build-ups of private (or local government) debt suggests that sooner or later these debts have a habit of winding up on the (central) government’s balance sheet. And from that perspective, China is as bad as anything that has come before it. Only bigger. Much bigger.

Signing Off

Inspired by a recent post by our NY office, I wanted to give readers access to some of the Chinese control levers for containing the economic consequences from the outbreak of the Wuhan Corona virus. While monetary policy will surely play its part, I think it is fair to expect considerable fiscal stimuli, as Xi Jinping seems to have put himself in charge of the efforts to combat the outbreak and its effects.

While recent data suggest that the spreading of the virus is losing steam and that the number of deaths is still very much concentrated to the Hubei province, implying only a passing economic effect, after years of both monetary and fiscal policy stimuli, the current situation highlights how restrictions on policy responses are finally emerging. Hopefully, China’s reaction to those woes will instill more confidence than the handling of the Corona virus outbreak.

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