China did it again – a new negative signal in the beginning of 2020

09:22 by Hubert Fromlet, Kalmar

Kina – dags för ny varning om ekonomin

Sammanfattning / Summary in Swedish

Den 2 januari i år bestämde Kinas centralbank ”People’s Bank of China (PBoC) att sänka affärsbankernas kassakrav från och med den 6 januari 2020 för åttonde gången på cirka två år. Ett sådant steg sker vanligen i syfte att stimulera ekonomin genom att den vägen öka bankernas utrymme till nya krediter.

Det finns dock tre problem i detta sammanhang. För det första kan en dylik åtgärd mycket väl tolkas som en negativ varningssignal, det vill säga att ekonomin verkligen har uppenbara tillväxtproblem (se min blogg från den 10 september och den 2 december 2019). För det andra är det inte säkert att utvidgade kreditresurser verkligen leder till en snabbare ökning av kreditefterfrågan. För det tredje kan man inte utesluta att ökad kreditgivning p g a sänkta kassakrav kan medföra en kvalitativ försämring av bankernas kreditportföljer, exempelvis genom att hålla svaga statsföretag under armarna.


It happened again, China has formally lowered the commercial banks’ cash reserve requirement at the central bank (PBoC), also called the Reserve Requirement Ratio (RRR) – for the eighth time since the beginning of 2018 (and further room to ease more). In previous blogs, I concluded that such an intended growth-stimulating measure should be interpreted as an obvious warning signal – but by avoiding a lot of noise. I maintain this view also this time.

However, I certainly got surprised when quite a number of interpretations in the beginning of January commented that the lowered RRR could function as the starting point for a positive turnaround of the current GDP-growth cycle. The additionally added liquidity for new credits amounts to 800 billion yuan or in dollar terms worth roughly 115 USD. This means something like 0.7-0.8 % of GDP, i.e. not as much as the absolute number may indicate.

The critical points of interpreting lowered cash requirements

At least currently I do not share this growth-favoring view on the lowered RRR, for three different reasons:

First, it can be doubted whether China currently really suffers from an insufficient supply of necessary new credits.

Second, it can be assumed that the current growth problems in the Chinese economy to a high extent are caused by structural and global political reasons; ongoing acute credit reliefs play in most future structural needs and political considerations like protectionism almost no role.

Third, there is an obvious risk that the banks will give additional credits to unhealthy state-owned enterprises which would mean a further weakening of the quality of their credit portfolios. Who believes, by the way, in the accuracy of the official ratio of non-performing loans (NPL) at 1,9 % of all bank credits (September 2019), provided by the China Banking and Regulatory Commission?

For my own sake, I would like to see much more transparency also in this statistical respect. Sure, more reliable NPL numbers would mean major progress. But how and when can we find out at some point that reliability really has been rising in the past quarters or years?

GDP for 2019 to be published soon without surprises – existing pressure to perform (officially) well in 2020

In my blog from December 18 last year, I wrote that “the official objective of meeting a GDP-growth rate between 6 and 6 ½% in 2019 will certainly be met, probably very close to 6 ¼% (more exactly, my own number is 6.2 %). As regards 2020, an official objective for GDP like “around 6%” or “6% exactly” can be expected. This would mean only a very slight downsizing from 2019.

But I cannot imagine any lower goal numbers than these two at this very moment – and I cannot imagine more than one quarter with an official GDP growth (very slightly) below 6 % – and if necessary, the GDP-growth curve has to be reversed to the better during 2020 ahead of the 100th anniversary day of the Communist Party in 2021 and the start of the new five-year plan – the 14th – the same year. Do not miss the publication of the preliminary GDP results for 2019 as soon as on January 17!

Only two days earlier, the U.S-China Phase One trade agreement is intended to be signed in the U.S. However, doubts remain, also what concerns future interpretations by the U.S. administration to what extent China is sticking to the agreement.

Later on, a Phase Two deal will probably become even more complicated than the Phase One agreement text. Many sensitive issues still have to be taken up and included in future agreements between the U.S. and China – among them in Phase Two the enormous Chinese government subsidies to state-owned enterprises and FDI restrictions for foreigners in China.

I will be back before the Lunar celebrations and the year of the Rat will start on January 25.

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