China: PBOC's liquidity injection shows easing bias but also reluctance to ease

According to several press reports this morning, the People’s Bank of China (PBoC) will inject RMB500bn liquidity into the country’s five biggest banks. According to these reports, RMB100bn will be pumped into each of the five major state owned banks. Apparently, there will be no explicit conditions on the use of the liquidity but the government is expected to guide banks’ lending into areas that have been deemed priority areas by the government recently, such as public housing and small private business. So far, there has been no official confirmation of today's press reports.

An injection of RMB500bn in liquidity would be equivalent to a cut in the reserve requirement ratio of close to 0.5pp for all Chinese banks as a whole. If RMB100bn is injected into each of the five major banks, it would, for example, be equivalent to a cut in the reserve requirement of close to 0.9pp for Bank of China (China’s third largest commercial bank). The reserve requirement ratio is currently a high 20% for the major banks. The injection of liquidity is also equivalent to c.0.8% of GDP.

This easing move (if confirmed) should be regarded as another small targeted easing move. Remember that earlier this year the PBoC implemented a targeted cut in the reserve requirement mainly for small and medium banks, so in this sense the injection of liquidity to the major banks just closes the circle. These targeted easing moves are largely a substitute for a cut in the official reserve requirement ratio. Hence, today’s move also suggests the PBoC remains extremely reluctant to ease using its official policy tools such as the reserve requirement ratio and the leading benchmark deposit and lending rates. This reluctance is probably because at this stage the PBoC does not want to signal a strong easing possible, fearing it could be another boost to credit growth.

Today’s move also underscores that monetary policy in China has become less and less transparent and this is starting to be a major problem. In mid-2013, monetary policy was tightened substantially, mainly by less injection of liquidity into the interbank market, but without any changes in the official monetary tools. Today’s easing move is just the latest of several targeted easing moves so far this year.

The bottom line is that the injection of liquidity into the major banks shows that, on one hand, the PBoC has an easing bias but, on the other, it remains very cautious and does not want to signal any major easing. There has been no substantial impact on interest rates in the interbank market today, so it is difficult to regard it as a significant easing move.

However, the economy appears to be losing momentum and there is increasing risk the government could start to undershoot on most of its macroeconomic targets. (1) The risk it will miss its 7.5% growth target for 2014 is increasing. (2) Inflation could decline below 2% in coming months. (3) Money supply growth has declined below the 13% y/y target. (4) We could soon reach the stage where credit growth is growing broadly in line with nominal GDP growth. Hence, the government could soon be forced into more substantial easing. In our view, there will be more substantial easing if manufacturing PMIs decline below 48 in coming months. We can no longer rule out a cut in leading interest rates despite the government’s reluctance to use its main policy tools.