Six months on and a lot has changed.
The financial world is now obsessed with the US Federal Reserve, trying to guess when the next interest rate hike will fall. And while Wall Street’s attention has been focused on what could arguably be called the world’s most influential central bank, China’s central bank, the People’s Bank of China has been active in its way.
Has China’s ‘stealth QE’ fixed the economy?
As the Fed has begun to tighten monetary policy, the PBoC seems to have begun its own aggressive quantitative easing policy. Indeed, according to analysts at Jefferies, to offset the contraction of the central bank’s balance sheet due to capital outflows and to offset US dollar repayments, the PBoC has engaged in a form of ‘backdoor QE’.
The PBoC has moved away from using conventional monetary policy tools over the past 12 months and has instead employed strategies such the introduction of short-term monetary instruments (medium-term lending facility and standing lending facility). These facilities have enabled the bank to increase lending to firms with cutting interest rates or RRRs further.
The increasing use of these two facilities has helped the bank accomplished two goals. Firstly, there is now no need to cut the RRR further. Further cuts to this key rate could have increased capital leakage. Secondly, with short-term funds it appears banks have brought Chinese government bonds.
As monetary policy has eased, the Chinese government has also been expanding fiscal policy to support the economy.
‘Backdoor QE’ is just one of the moderately bullish developments that have taken place in China over the past few months. Another development is the decision by companies to run businesses for cash to preserve their balance sheets. Corporate China is well known for having an unsustainable debt pile and concerns about companies’ borrowing have sparked speculation that China could be the epicentre of the world’s next financial crisis. However, according to Jefferies China’s corporate sector is now becoming more prudent with its finances:
“On a bottom up basis, we have noted within Jefferies research that many Chinese companies have moved from negative to positive free cash-flow over the past 12 months and are forecast to do so over the next 12 months. It would appear Capex cuts and better control of SG&A have contributed to the improvement. In our view, shareholders are being refranchised”, China: Credit Cycles and Debt-to-Equity Swaps (VIII), 8th August, 2016
Broadly speaking, this is a positive development although it could become a problem for the PBoC as it tries to stimulate further growth as it would appear the corporate sector has ‘saved’ a large proportion of the recent fiscal pump priming.
Are these the first signs that China is finally stabilizing?