China is not yet stimulating

Yesterday, the People’s Bank of China announced that the reserve requirement ratio (RRR) will be reduced by 50 basis points, effective on 24 Feb 2012.  The RRR is currently standing at 21% for large banks, thus the reserve requirement ratio for large banks will stand at 20.5% after the cut.  With about RMB80 trillion of total deposits, the reduction in RRR should theoretically make about RMB400 billion of deposits available for lending.

This is the second RRR cut since the tightening cycle ended last year.  However, as pointed out late last year, with modest capital outflow and shrinking foreign exchange reserves (if the trend continues into the new year), monetary conditions are tightening by themselves even without the central bank attempting to withdraw liquidity.  As a result, the latest cut in RRR will probably be a measure to offset the tightening bias of these monetary conditions.  We will need to have more data points in the coming months to be really sure, but on the data we have, the cut in the RRR is to offset tighter liquidity conditions rather that to support growth outright.

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  1. Another incomplete factoid. Have banks had RMB400 bill of credit worthy borrowers knocking on their doors only to be turned back because of reserve requirements? If not how is this relaxing of requirements going to impact credit? Add some context about what is happening on the ground otherwise the factoid is meaningless.

    • Zara is quite clear that this thesis hangs on the latest data and could be reversed if that’s the case. Perhaps you could tell us all about your interest in China Mr Point-the-finger-on-confrirmation-bias.

    • In any part of the credit cycle in any country in the world there is always demand from would be borrowers, so demand isn’t the problem, ever.

      What is difficult is finding quality borrowers during certain sections of the credit cycle when borrowers generally are choosing to reduce debt rather than expand debt.

      Inevitably lenders relax standards initially to get the flow of credit moving again, and then tighten later.

      • that’s silly Peter. Firstly I am talking about “credit worthy borrowers”. I would like to borrow 100 mill (and head to somewhere without an extradition treaty) but I am not credit worthy for that amount. Second I am talking about relative demand not absolute demand. i.e. I am not asking if demand is zero or whether there is any demand for credit. I am asking if there is sufficient demand, from credit worthy borrowers, to be met by credit supply by banks should reserve requirements be relaxed. Absent that information the article is another useless factoid from this blogger.

        • No it’s hardly silly – money is a commodity like no other – create the supply and demand will follow.

          The lender might have to work harder to be discriminating, but the demand will surely follow.

          • sorry that is ideology — build it and they will come. That claim is free of the burdens of empirical support.

            Exhibit #1. The USA. Ample capacity to lend but insufficient demand for credit.

            …and any other economy that has undergone a debt de/dis leveraging cycle.

            I said in my comment, and repeated in the follow up: “credit worthy borrowers”

            I have a demand for 100 mill. If all citizens had that demand would their demands be met if credit was expanded to that magnitude? Of course not. Open ended credit expansion doesn’t create open ended credit worthy borrowers.

            I think you are confusing availability of credit with relaxing of lending standards.

          • Tiges – there is plenty of demand for credit in the USA, but banks won’t lend in an enviroment of regulatory change that is still uncertain.

            You appear very certain on your points, but possess little fact.

            There is never a shortage of clever people with good ideas – do you think that they all die off in a recession. Actually that is when they have a good chance of building their infrastructure – when property and rents are cheap, and staff are prepared to work extra hours to protect their jobs.

            Did Apple not put out several new products during the recession, and did they not succeed?

            Would you have lent to them if they had needed capital?

          • where are your facts to support your assertion that banks aren’t lending because of regulatory uncertainty?

            Credit hasn’t dried up — you make it sound like lending has stopped — it has merely decreased. So whatever regulatory uncertainty exists hasn’t stopped loans from being made.

            I’m going out on a limb and suggest that a collapse of the housing market and U6 unemployment at 17-18% might lead to a decrease in aggregate demand for credit. Your hypothesis seems to suggest that if you expand the availability of credit, credit worthy borrowers will always be queuing up (!) but the 8 million of them lost jobs in 2008/2009 didn’t have an income to support a loan. That 8 million is still 5.6 million. That is a very large chunk of people out there how no doubt would like to borrow a lazy 10 million but are not credit worthy. Hence lack of demand from credit worthy borrowers regardless of how much credit may or may not be available.

            Did Apple not put out several new products during the recession, and did they not succeed?

            Would you have lent to them if they had needed capital?

            Wow. If Apple can borrow there must obviously be sufficient aggregate credit demand to meet whatever aggregate credit is being supplied.

            I’m going out on a limb here again but I’m thinking that Apple might be considered a credit worthy borrower by banks. Bit of a stretch maybe. Now I wonder what might have happened if unemployed Joe Sixpack who lost his job last year had of wanted to borrow a lazy 10 million?

          • Sorry Tiges – I thought that it was common knowledge that US banks were awaiting regulation changes and clarity before they will commit fully to lending – I simply don’t have the time to get you up to speed.

            Google “Greater clarity on the U.S. regulatory changes” and see what comes up.

          • Given your unwillingness to support your claims I can only assume you mean the volcker rule. How long has that been proposed. And before that what were the reasons for declining credit. I guess you’ll tell me to google that too. No doubt that there is always some proposed regulation that can be used to explain why demand for credit isn’t what a particular ideology expected.

            I would have thought that loan applications would be a good proxy for credit demand. But I guess you’ll tell me that because people know that banks aren’t lending, they aren’t filing applications, even though they really deep down, do want credit.

            What I did google was “does demand for credit from Apple mean demand for credit is matching supply of credit”. Google said “No.”

    • Appears..”the cut in the RRR is to offset tighter liquidity conditions”..and taken in context ..Your factoids above are almost
      meaningless..Hey Tiges
      Thanks Zara Cheers JR

  2. Can someone please explain to me the panic over falling house prices in China? After rising to absolutely unattainable levels, a drop of less than 1% over the past 4 months is being treated as some kind catastrophe.

    The Chinese government should reiterate their policies high and this reserve ratio cut is sending the wrong message. After all, if a tiny move down in house prices (after an uptick in inflation) is already resulting in easing, then there is no way that they will allow any meaningful decrease in house prices.

    I long for the day that house price falls are seen as a good thing. Otherwise, they may as well redo all articles and complain about how falling food, medicine and energy prices could devastate our economic growth. Then we can hear about how selfish all these bottom-tier moochers are to even suggest that their ability to have a decent standard of living takes precedence over speculator profits.

    • “I long for the day that house price falls are seen as a good thing.”


      Imagine how much better off we would be in Australia if real house prices had halved since 1990 instead of doubling.

    • I have trouble understand how the Chinese government manages such deviant behavior. If the top guys want property curbs, how can someone in Shanghai go against that? Can’t they just make them disappear?

      Any reason for higher property prices is wrong. Especially if you’ve built your locality finances to be entirely dependent on property taxes. Surely the top officials don’t want to build the ponzi ever higher?