MNI CHINA MONEY WEEK: China Backs Off From Tough Policy Calls

--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.

     --YUAN THE VICTIM

     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.

     --FISCAL STIMULUS A MAJOR RISK

     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: Asia-Editor@marketnews.com

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