So much for the “mini-stimulus.” Quietly, and with far less fanfare than stimulus measures in the past, Beijing is injecting sizable doses of cash into banks in the hopes that a few mega projects will boost spending and with it carry GDP growth toward its 7.5% target for this year.
Chinese media reported last week that the People’s Bank of China has injected hundreds of billions of yuan into state policy lenders China Construction Bank and China Development Bank via its relending scheme. The amount hasn’t been confirmed yet, but such a gush of liquidity would explain the boost in growth in China’s money supply (M2) from 12.1% year-on-year in March to 13.2% in April.
Some reports said that PBOC injected US$47.9 billion (RMB300 billion) into China Development Bank on the afternoon of May 21, resulting in a sharp drop in interbank rates.
If the rumors are true, the boost to the money supply has major implications for growth. “This type of relending could be treated as China’s QE (quantitative easing) as it is outright creation of money by the PBOC,” Bank of America Merrill Lynch said in a note.
The ample supply of freshly minted redbacks at China Development Bank could be used for the shantytown rehabilitation project, part of the central government’s new urbanization effort.
Japanese investment bank Nomura has compiled a list of China’s policy easing measures in 2014, starting with a signal from the central bank that it would ease the cost of borrowing just before Chinese New Year. Those include a US$127.8 billion investment into rail this year, up from US$106.1 billion in 2013; a cut in required reserve ratios at rural commercial and cooperative banks; and about US$16 billion in relending to small banks in early May.
If PBOC keeps up the relending to China Development Bank through June as some assume it will, that amounts to nearly US$79.9 billion of new money created in the first half of the year.
That might pale in comparison to QE in the US, where the Federal Reserve was recently adding US$80 billion a month to the money supply, but “we believe that, once the myriad of piecemeal measures are considered in totality, they are starting to amount to something quite significant,” Nomura said this week in a note to investors.
The recent monetary easing shows that Beijing’s GDP target for 2014 is a bit harder than once thought.
In March, during the National People’s Congress, the minister of finance called the 7.5% GDP goal a “soft target,” a sign that policymakers would allow growth to slow perhaps as low as 7% this year. Premier Li Keqiang has chimed in several times with similar themes, iterating that China would not sacrifice reform for faster growth. Officials have used the term “fine tuning” to describe how government spending would target key sectors to stimulate growth.
Even president and party boss Xi Jinping has called for China to adapt to a “new state” where government investment plays an increasingly smaller role in driving economic growth.
But perhaps the prospect of falling toward or below 7% annual growth is too much for the new administration to bear. Premier Li was quoted over the weekend as saying that development was still top priority. He called on local governments to hit all economic targets, a signal to regional officials that they shouldn’t be afraid to spend.
Fear among local cadres may account for a good deal of China’s slowdown. The anti-corruption campaign launched more than a year ago is slowing growth in areas not originally intended as officials grow paranoid over possible purges.
“The spreading and escalation of the anti-corruption campaign has greatly discouraged local government officials who either fear their proactive growth-seeking actions could be investigated or are not motivated enough as taking graft has become significantly riskier,” Bank of America Merrill Lynch said in a report.
The fact that the central government is leaning on local officials to pick up spending says a great deal about the undying importance of China’s GDP targets. This year isn’t shaping up to be the one where policymakers truly sacrifice growth in the name of rebalancing the economy.