Via FTAlphaville comes this fascinating description of the process of Chinese easing by Goldman Sachs.
When China is loosening these questions are much more complex and less transparent, for several reasons:
1. A larger number of bureaucratic players are involved. Apart from the central bank and the Ministry of Finance, other government agencies also play important roles. They include the National Development and Reform Commission (NDRC), the CBRC (China Banking Regulatory Commission), the CSRC (China Securities Regulatory Commission), the Ministry of Commerce (MOFCOM), Ministry of Housing and Urban Development, Ministry of Land and Natural Resources, Taxation Bureau, among others. Apart from government ministries, a large number of state dominated companies both in the real economy and in the financial system (including commercial and policy banks) play an important role. The heads of these organizations are typically senior party members and the equivalents of government officials. More players means the need for more coordination. At the ministerial level, the NDRC is usually the agency taking the lead role. But often coordination will take place at the State Council level.
2. China also has more policy tools compared with developed market governments. For example, in terms of liquidity management, the government often guides commercial banks to do things which they might not do if they were completely autonomous and focused on profit-maximization. Project approval adjustments and purchasing restrictions (with regard to properties and cars) are also an important tool the government uses.
3. The magnitude of China’s policy changes is typically not known in advance. One question often asked by investors when a new policy is announced, say on newly-started FAI, is how much was originally in the 5-year plan vs how much is new. But the reality is actual investments are not made according to the 5-year “blueprints” (the government intentionally uses blueprint to make it clear that this is not a rigid 5-year plan). Whether projects in the pipeline or under construction are completed in 3 vs. 6 years makes a huge difference for the economy in any given year. The government mostly takes a “tweak as you go” strategy, meaning it is impossible to know the size of the policy change until later.
4. Last, in terms of transmission, in western economies, monetary policy changes affect the economy via changes to cost of funding and final demand etc. In China these channels work as well, but the government can directly affect not only the amount of liquidity provided to the broadly defined banking system but also what commercial and policy banks do with the liquidity they have (via window guidance), and influence what non-financial companies do in terms of their borrowing and investment decisions. An often used analogy is monetary policy is like a string, one can pull it but can’t push it. In China, monetary policy is more like a stick though the stick has become incrementally softer than before. Chinese policy makers can enjoy this freedom partially because they directly control a large share of the economy, but also because other regulatory requirements in the economy are common and significant. As a result they have more room to lower the restrictions, e.g., in the case of investment approvals. China’s RRR ratio for example is at close to 20%, the highest among major economies. While we do not expect this to be cut soon, there is space for policymakers to do this if they want to. The level of interest rates is also relatively high compared with most other countries.
…Several steps are involved after political leaders–especially the Premier in terms of cyclical management, though the influence of the party chaired by the President has become greater under the new leadership– have decided on policy direction:
1. The State Council will host meetings to request ministries to come up with more detailed plans. This likely occurred at the start of the year.
2. Ministries then draft plans which are subsequently approved by the State Council regular meetings. This is what we have been hearing over the past month and a half. For example last week there was the announcement on support for exporters, likely proposed by the MOFCOM. The week before we had support for employment.
3. Ministries and local governments will then implement these plans, with the central government supervising progress. On infrastructure investment for example, funding is often a key constraint to slow growth. The central government typically provides more fiscal support, requests (commercial and policy) banks to provide more support and/or lower funding costs via Open Market Operations or other tools (e.g. RRR), and allows more bonds to be issued (NDRC, China Interbank Market Association and the CSRC all have some controls on debt issuance). At the same time the central government also follows up on the process on the ground by “calling” or sending out inspection teams to check on the pace of implementation. Those projects which received funding will be required to spend as soon as possible or they will face penalties such as bad reviews for the persons in charge and no future support as funding is allocated elsewhere. These measures including in person inspection, phone calls and meetings put direct pressure on the lower levels to act, and as a result the transmission process is often quicker than in other countries.
4. During this process the Politburo, (China’s most senior political body), composed of the top 25 politicians in the country often holds a meeting after the end of the quarter which puts more weight behind the decisions made by the State Council. This can be important because the system is fundamentally dominated by the party in terms of the most important decisions, such as personnel.
