The People’s Bank of China (PBoC) cut the reserve requirement ratio (RRR) by 25 basis points (bp) for all financial institutions. The spokesman called for a release of 500 billion yuan (or more than 70 billion US dollars) in a single cut, but if this had been the case, then the trillion debt crisis would have been easily resolved with a series of cuts more. The RRR cut is nothing more than the removal of banks’ lending limits. However, the problem now is not touching the credit ceiling, that is, it is not a lack of credit supply; rather, it is the demand for loans that has been too weak.
The best way to see this is to examine the direct relationship between RRR and lending by financial institutions. The attached graph shows the scatter plot of them where both are growing year over year (YoY). If RRR were an effective tool, we should see a negative relationship between its cutoff and loan growth. However, this is not always the case; from the start of the loan growth data from mid-1999 to now, only four years out of this 23-year period show a negative relationship.
The financial tsunami hit the United States hard, but never China. Although China’s stock indices fell 80 percent over time, the economy was not affected much. This was evidenced by the double-digit GDP growth seen before 2007 and just after the 2011 crisis, where house prices did not correct much. Without really experiencing a negative impact, the strong momentum of a sharp RRR cut around 2008 happened as expected. Loan growth increased to more than 30 percent a year after the stimulus policy. So what happened to the rest of the term?
Before the financial tsunami, the relationship between them was slightly positive. That was China’s boom period right after joining the World Trade Organization. The story was simple and the logic was reversed: it was the lending boom that led the PBoC to raise the RRR to curb overheating. Therefore, a positive co-movement of both going up was observed.
After the financial tsunami, China was in decline and GDP growth fell from double digits to low single digits. However, the decline was prolonged and continues until now, although the so-called soft landing has been achieved so far. Both investors (sellers) and consumers (buyers) have lost patience, and their behavior is no longer greatly affected by monetary policy. Consequently, loan growth remained at a similar level regardless of the change in RRR, as shown by the red circles and the trend line. The inhabitants of the mainland call this “lying down”.
From this, we can see when the trend line is sloping up, this is a good sign of a boom, and when it is sloping down, this shows that monetary policy is effective. But if the trend line is “lying down” (flat), then this is very problematic. There are no clues for politicians. Even now, there is no clear answer to get out of the problem of the Japanization of China (high debt and low growth).
The views expressed in this article are the views of the author and do not necessarily reflect the views of The Epoch Times.