Stimulus Rears Its Head In China As Economy Slows

There has been a contraction in the manufacturing activity in China for the third consecutive month in February 2019 according to data released by China’s National Bureau of Statistics. The Purchasing Managers’ Index (PMI) dropped to a level below the expectations of analysts.

This level also marks the lowest level of the official manufacturing PMI to its lowest levels since 2009 and analysts also predict a tough first quarter for the Chinese economy. There has been constant contraction since November 2018 in manufacturing in the economy as corroborated by private measures of the PMI for the month of February even though such figures tend to downplay the degree.

One of the contentious topic of discussions has been the methods that China should adopt to handle this slowdown. Broad monetary stimulus is rearing its head once again is the conclusion that one can arrive at following the examination of the economic data since the beginning of the year. That would also potentially bring in deleveraging objectives under a great deal of duress.

Since 2018, the liquidity valves have been slowly loosened by the policymakers of China. During the year, the Reserve Requirement Ratio (RRR) was reduced five times by the People’s Bank of China (PBoC). The RRR is the minimum quantity of reserves in money that a commercial bank need sot mandatorily keep in hold instead of lending out. But despite these actions, policy makers and leaders in China said at that time that the country would follow a “prudent” monetary policy which clearly indicated that the economy was heading towards a strategy of deleveraging and reform.

At that time, this strategy was affordable. Internal efforts to deleverage Chinese companies is believed to be a major cause of the modest economic slowdown witnessed in 2018 in the country. According to experts, contrary to common belief, the impact or contribution of the trade war with the United States was less to the slowdown in 2018. They claimed that at the most, the trade tensions in fact resulted in an increase in Chinese export orders for the larger part of 2018 as Chinese companies tried to frontload their products before tariff increases.

However the situation and outlook at the beginning of 2019 are quite different.

Firstly, there is now an impact on the Chinese economy because of the trade war with the US because of waning down effect of frontloading by companies. in February of 2019, the export orders subindex of China’s manufacturing PMI dropped to its lowest in a decade.

Om 2019, there can be more incentive for the PBoC to engage in “more aggressive” stimulus measures such as the injection of $83 billion into the economy through bond repurchase agreements with commercial banks by the central bank in January 2019. The central bank also plans to continue with further reduction of RRR in 2019, said Chinese premier Li Keqiang. While this would definitely increase the GDP growth but there would be stifling of lending because of low business confidence despite increase of liquidity.

(Adapted from TheDiplomat.com)

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