From Nomura:
According to the Chinese-language 21st Century Business Herald, the People’s Bank of China (PBoC) provided a loan of RMB100bn through its re-lending facility to China Development Bank (CDB) in April, for use in shanty town renovation. The government announced on 19 March plans to renovate shanty towns to boost growth – with spending, on our estimates, of RMB658bn in 2014 after RMB325bn in 2013. At the time it was unclear how this would be financed, but now it seems the PBoC will play a central role.
We see this as an important policy easing measure that suggests the overall monetary policy stance has indeed eased. It may help to explain why M2 growth rebounded sharply in April to 13.2% y-o-y from 12.1% in March, despite of decline in household and corporate deposits. Note that the PBoC already announced loans of RMB100bn to some of the smaller banks and rural credit unions through its re-lending facility in its Q1 monetary policy report. Moreover, the government announced to a cut in reserve requirements for some small banks on 16 April, which we estimate to have released about RMB90bn of liquidity. Combining the above actions and assuming PBoC lending to CDB continues in May and June at the same pace, the PBoC will have injected some RMB490bn of base money into the economy via its re-lending facility by June. This amount is equivalent to a 45bp cut of the reserve requirement ratio.
Elsewhere, the State Council met yesterday and decided to launch a set of water-management projects aimed at helping to stabilize growth. In the last two months the government has also announced efforts to boost growth via railway spending and shantytown renovation. Yesterday’s announcement is another signal that infrastructure investment will pick up.
Collectively, these various actions and announcements reinforce our view that the government will loosen monetary policy in Q2 in response to downside risks to the economy posed largely by the correction in the property market. We continue to expect growth to rebound slightly in H2, to 7.4% y-o-y in Q3 and 7.5% in Q4, from 7.1% in Q2. We expect growth to slow again in 2015 to 6.8% as easing measures are likely to push inflation higher next year, constraining the scope for further easing.
I draw precise the opposite conclusion. The PBOC is engaging in very targeted easing for very specific purposes and although it will certainly support growth, it will prevent any wider stimulus.
