China Unleashes a Liquidity Wave
The PBOC has begun a new push to stimulate a lagging economy, continuing the global easing cycle that is already underway.
In late September, the Chinese government introduced its largest monetary stimulus measures since the Covid-19 pandemic and announced that additional fiscal support would follow. This move comes after multiple attempts to revive the struggling shadow banks as they reel from the damage brought on by a slowly imploding real estate sector.
The monetary stimulus package announced by the People’s Bank of China consists of three key components. First, the PBOC will drop reserve requirement ratios by half a percentage point and lower the main policy interest rate by 0.2 percentage points. Both reductions are much larger than typical, and mirror the historic cuts made by the Fed. Additionally, the PBOC governor mentioned that further RRR cuts may be considered by the end of the year, depending on the economic conditions.
These cuts are a form of stealth easing. As I’ve covered in depth in Stealth QE, central banks have been busy finding new ways of being accommodative without doing so on the surface. With inflation globally hitting multi-decade highs in 2022, the monetary elites needed to find a way to appear to reduce balance sheet size without actually damaging the financial system. The Fed created BTFP and began drawing down Reverse Repo; the Bank of Canada began injecting repo liquidity, and the Bank of Japan tried to continue easing while at the same time running interventions in their foreign exchange market.
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