(Sept 17): China is injecting 500 billion yuan ($81 billion) into the nation’s largest banks, according to a government official familiar with the matter, signaling the deepest concern yet with the country’s economic slowdown.
The People’s Bank of China will funnel 100 billion yuan each to the five biggest banks for a three-month period, said the official, who asked not to be identified because the measure hasn’t been formally announced.
The credit expansion builds on targeted measures to shore up growth while stopping short of broad-based monetary and fiscal stimulus that increases dangers from bad loans. China joins the European Central Bank in adding liquidity, while the U.S. prepares to scale back stimulus.
The limited easing “keeps the rein in the central bank’s hand,” Helen Qiao, chief Greater China economist at Morgan Stanley in Hong Kong, wrote in a note. “Policy makers are resisting the pressure to cut rates or RRR universally by opting for such conditional easing,” she said, referring to banks’ reserve-requirement ratios.
The Sina.com website earlier reported the injection and the PBOC didn’t respond to faxed questions.
Bank stocks rallied in Hong Kong, the yuan halted a four- day slide and one-year interest-rate swaps dropped to the lowest level since June.
The injection marks “the first clear policy response to weak August data” on the economy, Goldman Sachs Group Inc. economists including Beijing-based Song Yu wrote in a research note. “We expect monetary conditions to loosen modestly, which will provide some much-needed support for demand growth. Other policies may follow.”
More Easing?
Further steps may include accelerating planned fiscal spending, the Goldman analysts wrote. They estimated that the 500 billion yuan extension of funds through the standing lending facility, or SLF, is roughly equivalent to a half percentage- point cut in the reserve ratio, though such moves tend to have a larger impact.
The five largest banks are Industrial & Commercial Bank of China Ltd., Agricultural Bank of China Ltd., China Construction Bank Corp., Bank of China Ltd. and Bank of Communications Co. Press officers at the five lenders declined to comment.
“This is like ‘printing money’ as base money is created,” Shen Jian-guang, Hong Kong-based chief Asia economist at Mizuho Securities Asia Ltd., said in an e-mail. “The immediate impact is similar to an RRR cut of 50 basis points to all banks.” Cutting banks’ RRR increases the amount they have available to lend.
Growth Concern
The weakest industrial-output expansion since the global financial crisis and moderating investment and retail sales growth shown in data released Sept. 13 underscored risks of a deepening economic slowdown. Those readings followed a second straight drop in imports and a 40 percent decline in the broadest measure of new credit for August, as well as indicators showing a manufacturing pullback.
“With growth slowing and regulators cracking down on shadow banking, it seems like the PBOC is trying to cut costs for preferred borrowers and sectors without reflating the property sector,” David Loevinger, former U.S. Treasury Department senior coordinator for China affairs and now a Los Angeles-based analyst at TCW Group Inc., said in an e-mail. “But it risks stepping back from a more market-based allocation of credit, which China sorely needs.”
The injection of funds underscored how the PBOC has yet to adopt the type of communication practices followed by its counterparts among the world’s largest economies. The ECB, Federal Reserve and Bank of Japan typically issue press releases for significant policy actions.
Targeted Tools
The PBOC had resisted broad monetary-policy easing after first-quarter year-on-year economic growth slipped to 7.4 percent. Instead, it used tools such as relending, rediscounting and pledged supplementary lending to direct credit to targeted industries or projects including low-income housing and agriculture and reduce their financing costs.
Regulators also increased banks’ capacity to lend money by changing the way loan-to-deposit ratios are calculated.
In a speech at the World Economic Forum in the northern Chinese city of Tianjin earlier this month, Premier Li Keqiang said the government won’t be distracted by short-term fluctuations in individual economic indicators and will maintain its focus on structural adjustments and dealing with long-term issues.
‘Showing Distrust’
“A pessimistic tone that China may miss its whole-year economic growth target and the government needs to adopt strong stimulus measures such as an interest rate cut is getting louder,” according to a commentary by the official Xinhua news agency published yesterday. “These noises emerge repeatedly because: on one hand, they are not seeing the New Normal in China’s economy, and on the other hand, they are showing distrust in China’s reforms.”
Before yesterday’s report, the central bank had made two targeted reductions in reserve ratios after instructions from the State Council, China’s cabinet. The first, in April, applied to some small rural banks and the second, detailed by the PBOC in June, covered most city commercial banks and non-county-level rural commercial banks and cooperatives.
“It appears that the PBOC finally started to become more aggressive to salvage a sluggish economy,” Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong, said in an e-mail. “However, the use of SLF also means the cut is not permanent as banks will have to pay it back later.”