Thu, Dec 25, 2014 - Page 15 News List

China central bank using stealth to stem downturn


The People’s Bank of China is turning to a hidden hand as it seeks to stimulate the world’s second-largest economy without worsening debt risks.

Contrary to the US Federal Reserve’s forward guidance, the Bank of England’s increased transparency and a G20 vow to clearly communicate policies, China has added liquidity by stealth at least four times in the past four months.

One proxy it has been using is China Development Bank Corp (中國開發銀行), the nation’s biggest policy lender.

Balancing the need to buoy an economy set for its slowest full-year expansion since 1990 and efforts to contain a debt pile that has almost doubled in six years, China’s leaders have sought a targeted monetary path that is deviating from advanced economy peers.

The problem is, by keeping in the shadows, speculators have jumped in, pushing the stock market up more than 20 percent since the central bank’s benchmark interest rate cut on Nov. 21 in anticipation of more monetary easing.

“It lacks both transparency and effectiveness,” said Ding Shuang (丁爽), senior China economist at Citigroup Inc in Hong Kong, who used to work at the Chinese central bank. “On this year’s policies, I can say I have no clue of their reasoning.”

On transparency, People’s Bank of China Governor Zhou Xiaochuan’s (周小川) past comments suggest he is less wedded to the global push for clearer policy signaling and prefers to let actions speak for themselves.

In a closed-door speech made at Tsinghua University in May, Zhou said forward guidance adopted by the Fed when it was running out of policy options may not serve China, which still has room to send clear messages via policy moves.

As for effectiveness, one criticism of unannounced liquidity injections is that they lack “signaling impact” compared with benchmark rate cuts or lowering the central bank’s reserve requirement ratios, analysts at Morgan Stanley led by chief China economist Helen Qiao (喬虹) wrote in a research note this month.

The central bank will lower the benchmark one-year lending rate by 25 basis points to 5.35 percent in the first quarter and by another 15 basis points by the end of June, according to economists surveyed by Bloomberg from Thursday last week to Tuesday.

The central bank may cut banks’ required reserve ratio by a total of 1 percentage point in the first half, the survey found.

The central bank rolled over at least part of a 500 billion yuan (US$80 billion) three-month lending facility to the largest Chinese lenders last week, days after it injected 400 billion yuan via China Development Bank, according to people familiar with the measures.

Neither move, nor an offer of short-term liquidity to banks, has been officially announced.

These steps followed a 1 trillion yuan loan to China Development Bank to bolster social housing reported first in the middle of the year, but only confirmed in a government statement this month.

Injections of 769.5 billion yuan in September and October were announced almost two months later in a quarterly report.

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