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MNI (London)
--Monetary And Fiscal Stimulus Shows Lack Of Willingness To Take Tough Measures
By Stuart Allsopp
     SINGAPORE (MNI) - On Wednesday this week, the PBOC announced further
monetary easing measures as part of an ongoing trend that we have been
highlighting over recent months and that contrasts starkly with the official
policy stance of prudent, neutral policy.
     The PBOC introduced incentives aimed at boosting liquidity at commercial
banks to help them expand lending and increase corporate bond investments. In
doing so, the PBOC will directly fund banks with cheap liquidity via its
Medium-Term Loan Facility (MLF) which will be used to help reduce financing
costs for struggling firms. 
     The Chinese Banking and Insurance Regulator (CSRC) has reportedly asked
financial institutions to help reduce financing costs for small firms, and will
receive double the amount of MLF loans for investment in corporate bonds rated
below AA+ in an effort to curb low-grade defaults.
     For all intents and purposes, this amounts to quantitative easing and is
the clearest sign yet that the PBOC is erring firmly on the side of supporting
the economy in the short term rather than encouraging deleveraging.
     The obvious victim of this policy has been an accelerated decline in the
value of the yuan. While many had feared that policymakers would take efforts to
stem the yuan's decline, and today's price action in the pair strongly suggests
the PBOC is trying to prevent a rout in the currency, the broader policy mix is
clearly a move to the contrary. 
     The risk is that increased lending to struggling firms amounts to throwing
good money after bad and the weaker yuan becomes self-reinforcing as the economy
deteriorates, triggering further monetary stimulus.
     Perhaps the main risk facing the yuan, however, is that of a potential
fiscal stimulus over the coming months. Senior political figures are weighing up
the benefits of a renewed fiscal stimulus drive after a relatively austere H1.
     Xu Zhong, the head of research for the People's Bank of China (PBOC)
recently criticized China's Ministry of Finance for not implementing fiscal
policy actively enough to stimulate economic growth, believing that the burden
of providing support to the economy was falling too heavily on monetary policy.
     A fiscal stimulus would likely accelerate the decline in the yuan. Unlike
previous such occasions when the currency managed to remain firm amid increased
fiscal spending, China's external accounts and low interest rate differentials
with the US mean that they will have much less control over the currency this
time around. A fiscal stimulus would likely see the yuan hit new multi-year lows
by the end of the year.
--MNI Singapore Bureau; +65 8233 2326; email:
[TOPICS: MMQPB$,M$A$$$,M$Q$$$,MC$$$$,MI$$$$]
MNI London Bureau | +44 203-865-3812 |

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