Today Bloomberg reports that China has introduced a new monetary stimulus program:
China’s central bank has unveiled a broad package of monetary stimulus to revive the world’s second-largest economy, underscoring growing concerns within Xi Jinping’s government over slowing growth and slumping investor confidence.
But is this what really happened? Here’s how the exchange rate for the Chinese Yuan responded to Monday’s news:
Note that this is actually the yuan price of dollars, so the sharp drop indicated a valuation in the yuan. The flat part is the weekend period, when the markets were probably closed.
I’m not sure, but it seems like markets initially treated the news as monetary stimulus, then changed course sharply. Michael Pettis has argued that Chinese monetary policy has become intertwined with credit policy.
Today’s Chinese financial system and that of Japan are structured in such a way that monetary expansion results primarily in credit expansion that, for well-understood institutional reasons, is focused primarily on the supply side of the economy.
If so, markets may have viewed this as fiscal stimulus rather than monetary stimulus. Keep in mind that currencies generally depreciate when there is unexpected news of monetary stimulus, and currencies often appreciate after news of fiscal stimulus (at least in countries where there is little fear of fiscal default). The Bloomberg article provides support for the view that this may have been more credit easing than monetary easing:
These moves were followed by a slew of other announcements that fueled gains in China’s beleaguered stock market. Also the head of the central bank revealed a package to shore up the country’s troubled real estate sector, including lowering financing costs on as much as $5.3 trillion in mortgages and relaxing rules on purchasing second homes.
Another article in Bloomberg suggested that China is in recession:
China now has all the symptoms of one “balance sheet recession”: a prolonged period of deflation, a decline in the real estate market and an excess of debt. And just like in Japan, an astonishing period of growth followed.
I don’t like the term “balance sheet recession” because these are simply tight money recessions – periods of slowing NGDP growth caused by tight money policies. Real estate prices are falling and debt levels are a symptom of tight finances. In a recent one blog postI suggested that China needed monetary stimulus. I suspect what they got is closer to the fiscal stimulus.