A two-month (or one month or a fortnight) of monetary and credit ease in China appears to be over. The People’s Bank of China (PBoC) turned the tap on briefly (to prevent what?) and is now closing it again, according to a Bloomberg news. This is based on their second quarter monetary policy report released on August 1. We do not know when the report was cleared for publication. We know that, in June, ‘Total Social Financing’ rose by nearly RMB2.0trn. Yes. You got that right. In fact, several stories appeared around mid-July that noted the relaxation of credit conditions by the central bank, by local governments, etc. You can read them here, here, and here.
So, is PBoC really turning the tap off after that big jump in TSF also known as Aggregate Financing? Let us read the fine print.
The central bank has also moved to implement State Council orders to lower financing costs. The benchmark seven-day repurchase rate fell 22 basis points last week to 3.90 percent, the biggest weekly drop in a month, after the PBOC guided funding costs lower in open-market operations.
It cut the interest rate on 14-day repurchase agreements to 3.7 percent after setting it at 3.8 percent at the last such auction in April. The previous rate reduction was for seven-day reverse-repos in August 2013.
Barclays Plc’s Hong Kong-based economist Chang Jian described it as a “small but meaningful move” that sends a signal of policy easing.
As is the norm for central banks, the PBoC speaks from both sides of the mouth. Perhaps, it is also using a two-handed monetary policy – ‘On the one hand’ and ‘On the other hand’.
This is worse than the policy fine-tune that Western central banks are doing. We know about the ending. The only question is when it arrives.
(Tyler Cowen has a good post on how China is able to ‘get away with it all’)