The weekend just gone has been full of news about China and the apparent application of its Zero Covid policy. But before we even reached the weekend there was this from the People’s Bank of China on Friday.
To keep liquidity adequate at a reasonable level, promote steady decline of overall financing costs, implement the package of policy measures to stabilize the economy, and consolidate the foundation of economic recovery, the People’s Bank of China (PBC) is scheduled to cut the required reserve ratio (RRR) for financial institutions by 0.25 percentage points (excluding those that have already implemented an RRR of 5 percent) on December 5, 2022. The weighted average RRR for financial institutions will be 7.8 percent after the cut.
It came with a lot of the usual rhetoric although I note that “foundation of economic recovery” rather concedes that China has economic problems. For those that do not understand what this means it is a type of “money multiplier” approach. If banks hold less with the central bank they can lend more to businesses and households. So it operates on broad money ( in China that is M2) via bank lending. The practical issue is whether banks choose to lend more but in theory they have the opportunity to do so and if they do it provides an economic boost. It is the “free up” bit below.
It will free up about RMB500 billion of long-term funds. The PBC lowers the RRR by 0.25 percentage points this time, which will be implemented across the board, except for some incorporated financial institutions that have already implemented an RRR of 5 percent.
Even in China the central bank echoes to the sound of “The Precious! The Precious!”
In addition, this RRR cut will reduce the cost of funds for financial institutions by approximately RMB5.6 billion per year, which will help lower overall financing costs for the real economy via the transmission of financial institutions.
In the explanation I found this rather curious.
refrain from adopting a deluge of strong stimulus policies,
So they do not think it is worth much?
What happened over the weekend?
Things seem to be been triggered by this.
The sudden outbreak of civil disobedience was initially sparked by outrage after a deadly apartment fire in Urumqi, Xinjiang, was partly blamed on coronavirus restrictions. ( Financial Times)
Which then led to this
Xi Jinping faces one of his greatest challenges as president of China after tens of thousands of people took to the streets over Beijing’s strict coronavirus controls and suppression of freedom of speech.
At least 10 cities, including Shanghai, Beijing and Chengdu, were shaken by rare political protests over the weekend, triggering clashes with police and security officers that led to a spate of arrests, including of two foreign journalists. ( FT)
Switching to a more direct economic impact last week had seen this.
SHANGHAI/TAIPEI, Nov 23 (Reuters) – Hundreds of workers joined protests at Foxconn’s (2317.TW) flagship iPhone plant in China, with some men smashing surveillance cameras and windows, footage uploaded on social media showed.
The series of protests there were expected to have this impact.
Reuters earlier reported that iPhone output at factory could slump by as much as 30% in November, and that Foxconn aimed to resume full production there by the second half of the month. Apple Inc (AAPL.O) had warned it expects lower shipments of premium iPhone 14 models than previously anticipated.
Trade
This is a crucial issue in many ways and we can go back to when I started this blog. This is because one of the imbalances which brought the world into the credit crunch was the Chinese trade surplus and right now we see this.
Care is needed when that sort of analysis is used because some of it may be a response to such imports but there is a point within it. This returns us to the issue of China being able to export strongly which is good for it but that it struggles with domestic demand and hence imports.Or as Michael Pettis puts it.
The irony of course is that policies that keep the surplus growing (including a weak currency and …lower interest rates) in turn increase China’s need for a growing surplus by further undermining domestic demand.
I am not sure where he is going with the lower interest-rate point as it will boost domestic demand but a weaker Yuan does tend to reinforce the exports/imports imbalance.
This is something we have seen elsewhere in countries with an exporting surplus and Japan comes to mind quite quickly. The “lost decade” era has seen weak domestic demand. We can perhaps add in an ageing population as demographics seem to be im play too.
Brad Setser has taken it further and suggested that the figures do not show how strong the manufacturing surplus is.
The popular deglobalization narrative simply isn’t in China’s trade data — manufacturing exports are up massively, and that has pushed the surplus up even as China’s commodity import bill reached record levels….
As he points out it is all quite a tangled web.
But at some level, a weaker CNY even with a massive trade surplus reflects a judgement by China’s policy makers that they need to sustain the rise in exports (relative to China’s GDP) even as global demand for manufactures drops (to offset China’s own domestic weakness)
So China is to some extent hiding how strong its export position is partly because it shows problems in the domestic economy. There is along the way an issue for us in the West as we were supposed to be reducing our reliance on China whereas the numbers suggest we are continuing to feed our addiction.
The issue even got a mention in the PBOC statement.
and strike a balance between internal and external equilibria.
Best of luck with that…..
The economy
We can start with what is a consequence of what essentially tighter US monetary policy. That has more more downwards pressure on the Yuan via the US Dollar and has also led to weaker prospects especially in Europe where the energy crisis is most acute. So many of China’s export markets are will see a weaker economy as we move into next year.
The latest business survey seems to be reflecting that.
Overall, firms’ confidence regarding output over the next 12 months slipped to its third-lowest since the survey began 13 years ago. ( Markit/S&P)
From the same survey this rather caught my eye as it gives different perspective to us western capitalist imperialists.
At the same time, companies in China foresee the
weakest inflationary pressures of all 12 regions covered
by the survey, with firms anticipating a softer rise in nonstaff costs in particular.
There is some backing for that with the oil price for Brent Crude some 3% lower at US $81 this morning, but as part of the reason is expected weakness in China the argument is rather circular. Also with even Japan seeing inflation at 3.8% ( Tokyo) I am a little suspicious of how it can only be 2.1%
Comment
Two themes collide here. One is our long-running one of the dependence of the Chinese economy and its property sector and the struggles of the latter. Next up is the Zero Covid policy which is simply an excuse for keeping the population subservient in my opinion. Returning to the issue of property I think we are seeing something of a concerted plan as we saw this on Thursday.
Six large state-owned #banks agreed to provide more than one trillion yuan of credit lines to #property developers…….#China Bond Insurance to provide credit enhancement for three private-run #property developers’ #bonds ( Yuan Talks )
The ones which just need liquidity will be helped but the ones which are insolvent will be further Zombified.
Also the fall in the Crypto space will have affected China if Bloomberg is correct. According to them there are 250 million crypto wallets in China and we know that it has been a way of getting money out of the country.
Next up is a more lateral line of thought. The Japanese Yen is strong today and is up 1% at 137.70. Are Chinese worries making the Japanese concerned and taking money back home?
Podcast
Notayesmanseconomics's Blog 
As well as keeping the Chinese people subservient, could the zero covid policy have the effect of damping down the economy a bit? If people can’t go to work exports would decline a little and help a bit on the huge trade imbalance you outlined.
Hi Jan
I think it is likely to reduce production and hence exports although whether their figures will cover that is open to question? Also trapping people at home will also reduce consumption and domestic demand just as they are trying to raise it. So the trade impact may be lower than the overall one.
Never understand why China, a country that is making more money than anywhere else on the planet by making stuff, decided to rig its property market so the middle class Chinese Rachmans bought up all the housing stock at mega bubble prices.
Bit of a crappy version of communism; though it is possible they watched the west do this and presumed it was capitalism, not knowing middle England are more reliant on state handouts than a workshy single mother from Solihull!
Hi Happening
There seem to be two establishment rules regardless of the claims about the economic system.
1. Central banks look after the banks.
2. Governments want higher house prices which also helps with point 1
Then we get told we are better off via wealth effects ignoring first-time buyers for a start.
Pingback: Shaun Richards: China looks to expand bank lending to support property prices and domestic demand - Brave New Europe