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chart of the week: China Turns On The Money Tap Again

09 October 2018

Bob Cunneen, Senior Economist and Portfolio Specialist

 

China's economic growth vs Reserve requirements

Sources: Thomson Reuters. 

China’s economy is under pressure. The trade war with the United States has intensified and shows no signs of a ceasefire. Tariffs have now been announced for US$250 billion of Chinese exports into the US. This should curb China’s export growth.

For China, this trade war comes at a particularly challenging time. Economic growth had already decelerated to only 6.7% in the past year to June 2018 (blue line). This is China’s slowest economic growth since the Global Financial Crisis from 2007/09. China’s share market has also had a tough year with the MSCI China Index down a painful -15% so far in 2018.

In response to this threat to China’s economic growth and the share market, China has started to relax monetary policy. The central bank has been pumping extra cash into the financial system since May to lower interest rates. Now the central bank has decided to cut bank’s reserve requirement by 1% beginning on October 15 (red line). This will allow the banks to hold less funds in cash and government securities, and thereby provide more credit to the economy. However by turning on this money tap, the risk is that some borrowers will eventually drown in debt. So China’s current drive to stabilise their economic growth could ultimately come at the expense of future financial instability.

 

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