The author is head of Greater China research at Standard Chartered, Stephen Green
Is that the rumble of the Godzilla of monetary policy easing we hear? Maybe.
A debate is raging in Beijing about whether to cut commercial banks’ reserve requirement ratio (RRR). Today, we run through the numbers and show that if history is any guide, a RRR cut should have already happened.
The problem is that history is not a great guide. Faced with slower growth, the Li Keqiang government is clearly reacting differently than the previous administration. Party Secretary Xi Jinping says that China should get used to a "new normal" economic situation. Both should be congratulated for holding the line and attempting to push through difficult reforms.
However, while de-leveraging cannot be achieved with super-loose monetary policy, it also cannot be attained with high real interest rates and low (and slowing) nominal GDP growth. We believe the time is coming when a RRR cut and broader-based easing will be needed to stabilize growth.
Commentators including a former People’s Bank of China (PBoC) deputy governor have spoken out in recent days against the need for a RRR cut, and looser monetary policy generally. In addition, PBoC Governor Zhou Xiaochuan said last weekend that the economy does not need a "large-scale stimulus." We guess that he might view a RRR cut as such a move.
Those opposing a cut believe that the economy, while slowing, does not have a jobs problem, or that there are systemic risks in the financial system. So why cut? They are also concerned that a RRR cut would signal that Beijing is relying again on easy monetary policy and putting off difficult structural reforms.
Others advocate or expect a RRR cut in the second quarter or early third quarter. We fall into this camp.
We have a negative short-term view on growth in China. Credit growth is slowing and housing is heading into what could be a messy correction.
In addition to creating more room on banks’ balance sheets to lend, we believe a RRR cut will soon be needed to shore up onshore confidence.
In order to be effective, a cut would have to be coordinated with other measures, such as more relaxed enforcement of banks’ maximum loan-deposit ratios and lower mortgage rates and down-payment ratios.
Zhu Baoliang, a senior economist at the State Information Center, called this week for more monetary policy flexibility and a RRR cut.
We now take a look at what triggered Beijing to cut the RRR in the two cutting cycles in recent memory.
Starting in September 2008, the RRR was reduced by a total of 250 basis points. This was in response to the global financial crisis and a collapse in external demand – a clear emergency.
The RRR was also cut in December 2011 and February 2012, by a total of 100 basis points. This move was more similar to today’s situation, coinciding with a slowdown in industrial activity and housing.
The economy is set to slow further this year given the downdraft caused by the real-estate sector, high real interest rates and very low profit growth. Structural reforms are unlikely to deliver a meaningful growth dividend, and there is limited room to ease via the exchange rate.
In sum, we think there is a strong argument for easier monetary policy. The PBoC already appears to have lowered interbank rates, which should boost bond issuance and discounting of bankers’ accepted drafts.
This policy easing has been conducted without any official signal. But growth is going weaker in the third quarter and clear evidence that Beijing is moving to stabilize the economy will become more important. You just cannot de-leverage an economy which is not growing.
(The article has been edited for clarity)