China cuts rates to stem crisis, but doubts grow on foreign reserve buffer
'There are reasons to question the robustness of China’s reserves,' said Citigroup. Contrary to general belief, China has one of the lowest reserve ratios among emerging markets
By Ambrose Evans-Pritchard
9:19PM BST 25 Aug 2015
The PBOC has intervened heavily on the exchange markets to defend the yuan Photo: STR/AFP/Getty Images
China has injected $100bn of liquidity into the country’s financial system and cut interest rates to records lows in a "shock-and-awe" bid to restore confidence, but worries persist that even this may not be enough to avert a crunch as capital flight surges.
The move came as the authorities abandoned their futile efforts to shore up the stock market, allowing the Shanghai Composite index of equities to plummet by a further 7.6pc on Tuesday. It has tumbled by 22pc in the past four trading days.
Mark Williams from Capital Economics said Beijing has made a strategic decision to let the stock market find its own level after the fiasco of recent weeks, switching stimulus instead to the broader economy.
The central bank (PBOC) cut the reserve requirement ratio (RRR) for lenders by 50 basis points to 18pc, freeing up roughly $100bn of fresh funds. It also cut the one-year lending rate by 25 points to 4.6pc.
Mr Williams said the combined cuts are rare and amount to a dose of “shock and awe” in Chinese policy language. “It is a statement that policymakers mean business,” he said.
Wei Yao from Societe Generale said the RRR cut was “absolutely necessary” to stop liquidity drying up and to reverse the passive tightening over recent weeks caused by capital outflows.
It may not be enough to add any net stimulus to the economy. “Liquidity conditions are still under immense pressure,” she said.
The PBOC has intervened heavily on the exchange markets to defend the yuan, drawing down reserves at a blistering pace. The unwanted side-effect is to tighten monetary policy. It is a textbook case of why it can be so difficult for a country to deploy foreign reserves – however large on paper - in a recessionary downturn.
The great unknown is exactly how much money has been leaving the country since the PBOC stunned markets by ditching its dollar exchange peg on August 11, and in doing so set off a global crash.
Some reports suggest that the PBOC has already burned through $200bn in reserves since then. If so, this would require a much bigger cut in the RRR just to maintain a neutral setting.
Wei Yao said the strategy of the Chinese authorities is unworkable in the long run. If they keep trying to defend the exchange rate, they will continue to bleed reserves and will have to keep cutting the RRR in lockstep just to prevent further tightening. They may let the currency go, but that too is potentially dangerous.
She said China can use up another $900bn before hitting safe limits under the International Monetary Fund’s standard metric for developing states. “The PBOC’s war chest is sizeable, but not unlimited.
It is not a good idea to keep at this battle of currency stabilisation for too long,” she said.
Citigroup has also warned that China’s reserves – still the world’s largest at $3.65 trillion but falling fast – are not as overwhelming as they appear, given the levels of short-term external debt. The border line would be $2.6 trillion.
“There are reasons to question the robustness of China’s reserves adequacy. By emerging market standards China’s reserves adequacy is low: only South Africa, Czech Republic and Turkey have lower scores in the group of countries we examined,” it said.
China’s authorities hope the latest move will be enough to calm markets before the full effects of fiscal stimulus and growing credit feed through to the real economy.
Analysts are starkly divided over whether the Chinese economy is over the worst after hitting a brick wall in the first half the year, chiefly caused by a contraction in fiscal spending from December to March as local government reform went badly awry.
Spending is now back on track as a crucial new bond market gets off the ground. The PBOC has also injected $180bn into the China Development Bank for new projects.
There are signs of tentative recovery. House prices have been rising for the past three months. Demand for petrol for transport jumped by 17pc in July from a year earlier. Imports of alumina jumped 144pc, suggesting that the crisis in the aluminium industry is abating.
While manufacturing is still in slump, the service (tertiary) sector is twice as big and is growing at a 10pc rate as China’s leadership tries to wean the economy off export-led growth and excess investment. Services have jumped from 45pc to 50pc of GDP over the past three years, rendering the old measures of China’s economic health almost useless.
Europe and America are both picking up speed. The Conference Board’s index of consumer confidence in the US surged from 91 to 101.5 in August, the second highest reading since 2007.
The Chicago Fed’s national activity index turned positive in July and is now strongest so far this year, pointing to robust expansion over coming months. World trade volumes rose 2pc in June after contracting earlier this year, according to the latest CPB survey in the Netherlands.
These sorts of readings are hard to square with pervasive worries that the world economy is going into a tailspin. Several of the big global banks and investment funds have issued calls this week arguing that the violent equity sell-off in August is a buying opportunity.
Goldman Sachs said the collapse in commodity prices has been widely misread as a sign of impending economic slump when in reality it is due to surging supply, and is therefore benign. “Markets are over-interpreting the collapse of oil and commodity prices as a negative growth signal,” it said.
Bank of America said global bourses are as “oversold” as they were in the height of the Lehman crisis in October 2008, an episode followed by a 20pc rally in two days. All that is needed to set off a V-shaped rebound after the August rout is a “catalyst”, it said.
Whether China’s RRR cut will do the trick is an open question. We may have to hold our breath and hope that the boost to confidence lasts long enough for economic recovery in the US, Europe and within China itself, to gain full traction. If it does, fears of imminent Gotterdammerung will fade away.
Wei Yao from Societe Generale said the RRR cut was “absolutely necessary” to stop liquidity drying up and to reverse the passive tightening over recent weeks caused by capital outflows.
It may not be enough to add any net stimulus to the economy. “Liquidity conditions are still under immense pressure,” she said.
The PBOC has intervened heavily on the exchange markets to defend the yuan, drawing down reserves at a blistering pace. The unwanted side-effect is to tighten monetary policy. It is a textbook case of why it can be so difficult for a country to deploy foreign reserves – however large on paper - in a recessionary downturn.
The great unknown is exactly how much money has been leaving the country since the PBOC stunned markets by ditching its dollar exchange peg on August 11, and in doing so set off a global crash.
Some reports suggest that the PBOC has already burned through $200bn in reserves since then. If so, this would require a much bigger cut in the RRR just to maintain a neutral setting.
Wei Yao said the strategy of the Chinese authorities is unworkable in the long run. If they keep trying to defend the exchange rate, they will continue to bleed reserves and will have to keep cutting the RRR in lockstep just to prevent further tightening. They may let the currency go, but that too is potentially dangerous.
She said China can use up another $900bn before hitting safe limits under the International Monetary Fund’s standard metric for developing states. “The PBOC’s war chest is sizeable, but not unlimited.
It is not a good idea to keep at this battle of currency stabilisation for too long,” she said.
Citigroup has also warned that China’s reserves – still the world’s largest at $3.65 trillion but falling fast – are not as overwhelming as they appear, given the levels of short-term external debt. The border line would be $2.6 trillion.
“There are reasons to question the robustness of China’s reserves adequacy. By emerging market standards China’s reserves adequacy is low: only South Africa, Czech Republic and Turkey have lower scores in the group of countries we examined,” it said.
China’s authorities hope the latest move will be enough to calm markets before the full effects of fiscal stimulus and growing credit feed through to the real economy.
Analysts are starkly divided over whether the Chinese economy is over the worst after hitting a brick wall in the first half the year, chiefly caused by a contraction in fiscal spending from December to March as local government reform went badly awry.
Spending is now back on track as a crucial new bond market gets off the ground. The PBOC has also injected $180bn into the China Development Bank for new projects.
There are signs of tentative recovery. House prices have been rising for the past three months. Demand for petrol for transport jumped by 17pc in July from a year earlier. Imports of alumina jumped 144pc, suggesting that the crisis in the aluminium industry is abating.
While manufacturing is still in slump, the service (tertiary) sector is twice as big and is growing at a 10pc rate as China’s leadership tries to wean the economy off export-led growth and excess investment. Services have jumped from 45pc to 50pc of GDP over the past three years, rendering the old measures of China’s economic health almost useless.
Europe and America are both picking up speed. The Conference Board’s index of consumer confidence in the US surged from 91 to 101.5 in August, the second highest reading since 2007.
The Chicago Fed’s national activity index turned positive in July and is now strongest so far this year, pointing to robust expansion over coming months. World trade volumes rose 2pc in June after contracting earlier this year, according to the latest CPB survey in the Netherlands.
These sorts of readings are hard to square with pervasive worries that the world economy is going into a tailspin. Several of the big global banks and investment funds have issued calls this week arguing that the violent equity sell-off in August is a buying opportunity.
Goldman Sachs said the collapse in commodity prices has been widely misread as a sign of impending economic slump when in reality it is due to surging supply, and is therefore benign. “Markets are over-interpreting the collapse of oil and commodity prices as a negative growth signal,” it said.
Bank of America said global bourses are as “oversold” as they were in the height of the Lehman crisis in October 2008, an episode followed by a 20pc rally in two days. All that is needed to set off a V-shaped rebound after the August rout is a “catalyst”, it said.
Whether China’s RRR cut will do the trick is an open question. We may have to hold our breath and hope that the boost to confidence lasts long enough for economic recovery in the US, Europe and within China itself, to gain full traction. If it does, fears of imminent Gotterdammerung will fade away.
0 comments:
Publicar un comentario