beyondbrics

China hit the stimulate button on Wednesday as slowing growth and inflation spurred the government into action – vindicated by Thursday’s negative PMI number.

Beijing’s 50 basis point cut in reserve requirements for all China’s banks was a decisive shift in monetary policy and one that is set to continue into 2012. But confusing this round of easing with the enormous stimulus package unrolled in 2009 would be a mistake.

HSBC argues that Wednesday’s move is a response to the risk that China is shifting quickly from inflation to deflation. HSBC think this means more aggressive policy easing in 2012, including potential further cuts to reserve requirements of 150 bps. This from a note to clients on Thursday:

First, the central bank will make an across-the-board easing. As with the policy tightening cycle, we expect quantitative tools to be used. Following the PBoC’s surprise 50bp reserve ratio cut announced 30 November, we now look for another 150bp reserve ratio cuts in the first half of 2012, a higher monetary target (16 per cent vs the current actual 13 per cent) and central bill redemption to drive monetary easing next year. We don’t expect a cut in interest rates until CPI inflation falls below 3 per cent, probably in the second half of 2012.

What’s more, HSBC expects fiscal policy to play an even bigger role than monetary policy in the coming stimulus:

Total fiscal revenue is surging nearly 30  per cent y-o-y and the central government’s net cash position has topped RMB4.2trn (9 per cent of GDP). This puts Beijing in a strong fiscal position to cushion a slowdown in growth. Watch for tax cuts for small and medium-sized enterprises (equivalent of around 1 per cent of GDP), additional spending on public housing and ongoing infrastructure projects and more subsidies for poor rural households.

But Andy Xie, economist at Rosetta Stone Advisors, says any fiscal stimulus will not come close to that of 2009. Like HSBC, he expects China to continue easing as part of global initiatives to stabilize the financial system and support growth. But Xie wrote on Thursday that the cut in reserve requirements was above all a bid by Beijing to hit its target for money supply growth and shouldn’t be confused with 2009′s aggressive move to support the economy and property market.

He says two factors are harming money supply growth by driving capital outflows (foreign exchange reserves fell in October for the first time since 2008): falling property price at home and a rising dollar. And although China’s property bubble does seem to be bursting, he says the government couldn’t stop this happening even if it wanted to:

In 2009 it took a 40 per cent increase in bank lending, both on and off balance sheet, to revive the bursting property bubble. It would require even more to revive the current one. The government is in no position to do so, even if it has the intention to do so. A repeat of the 2009 policy would certainly lead to currency devaluation, massive capital flight, and economic collapse. I don’t think that this reduction of the RRR is anything intended to revive the bubble. Nor would any future RRR reduction.

The money supply quantity is China’s policy target, I believe.  As the average growth rate for this decade is likely to be 8 per cent, the long-term target for broad money growth should be 12-13 per cent.  The current growth target of, I believe, 15 per cent is above the long-term sustainable rate.  Hence, it shouldn’t be considered tight.  It feels tight because some bubble activities like land hoarding require so much money.  The way out is for such activities to cease rather than for money supply to rise to meet the demand for speculation.

Not exactly a clarion call for more stimulus then.

Related reading:
The eurozone really has only days to avoid collapse, FT
China cuts reserve requirements: real easing at last? beyondbrics
Shanghai shines a light on China’s economy, FT
China fears lasting worldwide recession, FT
China money market rates tumble, FT
China: Just how fine a tuning? beyondbrics
Guest post: China must not loosen policy too quickly, beyondbrics