What it means for China
The range and nature of measures used tell us three things.
Firstly, the PBoC was compelled to act because a major economic slowdown shifted from a prospect to a reality in June.
Secondly, China used a nuanced, targeted approach, differing markedly from the heavy-handed, quota-driven monetary policies of the past.
Thirdly, China's bond market is now more important than ever. The shift to diversified financing channels from a bank-dominated financial system is happening and, like in the US, China's bond market now gives visibility into the economic outlook.
What it doesn't mean
Despite the hopes of the sell-side and commentators applying China's past behavior to the current situation, it doesn't mean that China has dramatically loosened policy and decided to flood the economy with credit - and current real estate policy gives a guide to official thinking.
Long used as a tool to prop up the economy during tough times, China's real estate market had a key source of policy support withdrawn in June.
In June, China Development Bank (CDB), China's largest policy bank, announced a rollback in the estimated RMB 1.26 trillion it provides for shantytown development, a national project dating from 2008 that builds new projects to replace old housing and finances residents' purchases
That's significant because shantytown development has boosted the real estate sector, accounting for 19% of national sales in 2017. Now that loans to developers have been curbed or access curtailed, a key support for the sector, and the economy, has been withdrawn.
A painkiller, not a steroid
With this in mind, we see the PBoC's policy prescription in June 2018 as a painkiller rather than a steroid.
That is different from the steroid-like, large-scale policy stimulus enacted in 2008 and 2015 that boosted the economy in the short-term but saddled the financial sector with unsustainable debts in the longer-term.
The reality of continued sales restrictions on the real estate market, plus the shantytown policy change from CDB, means support for the economy remains limited and resolve remains in China's core leadership to continue deleveraging the financial system.
Liquidity remains tight
And current money market conditions tell us two things:
- Firstly, liquidity has eased slightly, but only slightly. Bond yields have fallen but still remain high by historical standards. Many regulations on bond financing introduced during the deleveraging drive still hold and aren't about to be taken away.
- Secondly, China's monetary authorities aren't interested in making life much easier. Look at key rates like seven-day repos, interbank deposits, and 3-month Shibor – they have all been increasing since mid-August and we have seen little in the way of open market operations to put downward pressure on rates.
Slower growth ahead
Put together, this means that the real impact to the economy from the PBoC's policy support in June and July will likely be neutralized, adding further weight to our expectation of slower growth in prospect for China in late-2018 and into 2019.
Crucially, despite intervention to ease liquidity, controls on China's shadow banking channels - a source of China's debt build-up and an indirect way of putting credit into the economy - remain robust, and flows remain well in negative territory so far this year.
Exhibit 6: Shadow banking channels: Entrusted loans, trust loans and undiscounted bankers' acceptances (RMB trillions), Jan 2017-Jul 2018