In word and deed, China loosens economic policy


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BFR BERNANKE, the former chairman of the US Federal Reserve, entitled his memoir “The Courage to Act”. But a lot of what central bankers do these days is talk. They talk about what they are doing, doing and could do. In the central bank, words can speak louder than stocks.

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China is no different. Its macroeconomic policy is a combination of acts and signals, execution and exegesis. On December 6, for example, the People’s Bank of China announced that it was reducing the reserve requirement ratio (the amount of money banks must keep in reserve, as a percentage of deposits) by half a percentage point. , compared to a weighted average of 8.9% to 8.4%. This, he said, would “free up” about 1.2 billion yuan ($ 190 billion) in funding.

The cut was, you might think, a simple act of easing – an understandable response to the downturn in the economy, a changing virus, and the financial risks posed by real estate developers, two of whom (Evergrande and Kaisa) have made. default on their offshore bonds, according to Fitch, a rating agency, soon after the cut.

But the decision came with a few caveats. “The stance of a sound monetary policy remains unchanged,” the central bank said. He also pointed out that banks will need some of the additional funds (around 80% of them) to repay the central bank’s medium-term loans which fall due on December 15. In other words, much of the extra money would soon go to the institution that released it. The impact of the reduction “is likely to be neutral,” said one analyst, as quoted by Daily economy, an official journal. An editorial in the same newspaper cautioned against the “relatively simplistic” view that a reduction in reserve requirements amounted to “loose” macroeconomic policy.

So, are Chinese policymakers slacking off or not? The short answer is yes, they do indeed soften. But not without scruples and qualifications. They want to stabilize growth. But they do not want to relaunch speculation, especially real estate. Their expansionist actions therefore come with a lot of clarifying and cautionary chatter.

The clearest evidence of the easing may not lie in the actions of the central bank, but in the words of the Politburo, the 25-member body that oversees the Communist Party. After a meeting on December 6 to set the macroeconomic tone for 2022, he focused on expanding domestic demand and preserving the “six stabilities” (in jobs, finance, trade, foreign and domestic investment and expectations). The Politburo also had a few words of comfort for the beleaguered real estate market. He said the sector should be supported to better meet the “reasonable” demand from home buyers. (“Reasonable” has not been defined. But it is safe to say that this does not include buying a property and keeping it unoccupied in the hope of selling it for a higher price.)

The debate now is not whether China’s policymakers are easing up, but by how much. Because the stimulus can take many forms, especially in China, measuring its overall scale is not easy. An attempt to do so, by Goldman Sachs, a bank, combines indicators of monetary policy (the benchmark lending rate and market rates), credit policy (including reserve requirements), fiscal policy and housing policy in one index. Faced with the global financial crisis, this index fluctuated by nearly 2.9 points on its scale (see graph). It swung by just over two in response to China’s slowdown in 2015 and just under two after the start of the pandemic.

The easing in the first ten months of this year has been modest in comparison. The latest reduction in reserve requirements will add to this, but not by much on its own. Policymakers therefore have a lot of leeway before they can be accused of having reproduced the 2008-09 “deluge” of stimulus measures, which gained a reputation for debauchery, despite its brutal effectiveness in bringing China back on its feet. pre-crisis economic trajectory.

If Chinese policymakers had an equivalent clue, their warning rhetoric could be calibrated more precisely. “We can lighten up by one point but not two,” they might say. In the absence of such a measure, Chinese observers have the more difficult task of inferring macroeconomic intentions from vague party slogans. How many reductions in reserve requirement ratios, one wonders, will be necessary to preserve the six stabilities? ■

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This article appeared in the Finance and Economics section of the print edition under the headline “Is China Going Softer?”

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