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China Announces New Stimulus Measures

Another day, another stimulus announcement by China.

One day after Beijing threw in the towel, and in addition to monetary easing announced it would be far more “proactive” in fiscally stimulating the country, Chinese banks received notice from regulators on Wednesday that a core capital requirement will be eased in order to support lending, as Beijing uses the ongoing trade war as a scapegoat to unleash another massive stimulus – think Shanghai Accord just without the foreign central bankers and without the US.

This is merely the latest in a wild scramble of easing initiatives unleashed by China in the past three months, and summarized in the chart below.

As Bloomberg reports, the PBOC told some institutions Wednesday that the so-called “structural parameter” in the Macro-Prudential Assessment of their balance sheets will be lowered by around 0.5 points, reducing required capital buffers.

Acording to Bloomberg sources, the PBOC said that the change is being made to support local financial institutions in meeting credit demand effectively, which is another way of saying allowing the country’s banks to purchase more of China’s AA- rated “junk bonds” which have tumbled in recent months.

Last week, the PBOC offered a record amount of Medium-term Lending Facility loans with the proceeds meant to be used for purchasing the riskiest bonds – and has cut reserve-requirement ratios three times this year.

China’s scramble to stimulate the economy, both monetarily and fiscally, comes as the country’s broadest credit aggregate, Total Social Financing, has fallen to a record low as a % of China’s M2.

The financial deleveraging campaign since early 2017 has resulted in a severe negative shock to aggregate credit supply. The real economy has begun to feel the pain, as credit growth slumps and interest rates rise.

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