Alarming signal from China

08:00 by Hubert Fromlet, Kalmar



Larmtecken från Kina

Sammanfattning / Summary

Kina har gjort det igen – sänkt kassakraven för bankerna i centralbanken People’s Bank of China. Det är den sjunde gången på knappt två år och redan den tredje gången under innevarande år. Det bör tas som ett larmtecken trots förekommande tillförsikt av en del analytiker och kapitalförvaltare. För mig är bankernas kassakrav en vida viktigare konjunkturindikator än, till exempel, Kinas två inköpschefsindex. Reducerade kassakrav ökar också risken för försummat och eftersläpande strukturarbete.

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It happened again: Chinese decision-makers lowered the banks’ cash requirements in the People’s Bank of China (PBoC) by another 0.5 percentage points for larger banks (and even more for smaller banks), already for the third time this year. This step means a relief by 900 billion yuan (or equivalent to 126 billion USD on September 6) that can be used for new credits.

In my own interpretation, this latest reduction is another clear signal by Chinese political decision-makers – obviously mainly promoted by Prime Minister Li Keqiang – that the economy keeps on giving strong reasons for concern. Furthermore, the latest reduction is already the seventh since the beginning of last year – i.e. the beginning of the trade war with the U.S. (or the other way around if you want). This is quite a trend. It also could be added that I did not find any remark about this important policy measure on the website of the PBoC (hopefully I missed it myself).

It should not be overlooked that the further loosened credit conditions also increase the risk of undermined structural changes and improvements – as already in detail decided six years ago at the Third Plenum of the Communist Party. Evaluation will take place next year!

Also in this blog, I have often expressed that reductions of cash requirements in the PBoC are a good indicator for growth problems in the Chinese economy. In such a situation, GDP numbers use to become less reliable. Thus, I give more analytical attention to this ongoing real monetary policy than to the forthcoming statistical GDP numbers for q3 and q4, close to (most probably) 6 %.

Anyway, a clear result of the American-Chinese trade war can be seen also in the American trade numbers. In the first half of 2019, American imports from China declined by 19 percent – and American exports by remarkable 12 percent as well (with Chinese export values four times higher than the American). This loss of American exports to China indicates clearly that trade wars are not “easy to win”, contrary to what President Trump commented some time ago. Even global losses are obvious these days!

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board

 

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