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Analysis: China’s high growth on hold

The latest salvo by China’s policymakers to stimulate the nation’s slowing economy may well provide a short-term boost but is unlikely to be the panacea markets are hoping for, experts claim.

Early February saw the People’s Bank of China (PBoC) slash the reserve requirement ratio (RRR) for commercial banks by 50 basis points, taking it to 19.5 per cent for the vast majority of institutions. Some smaller banks will receive an additional 0.5 per cent cut.

The strategy – essentially a form of light quantitative easing – raises banks’ lending capacity by allowing them to hold less cash in reserve, thus freeing up their ability to provide credit to businesses and individuals.

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The move follows the Bank’s surprise decision in November to slash its benchmark-lending rate by 40 basis points to 5.6 per cent and its deposit rate by 25 basis points to 2.75 per cent. The PBoC also lowered the RRR for selected banks in 2014 but its latest action represents the first cut in this cycle to apply across the board.

Research hub Capital Economics estimates this month’s move is equivalent to a monetary injection onto banks’ balance sheets of some $96bn (£63bn). But, as Kathleen Brooks, a research director at Forex.com, points out, given the Chinese economy is worth $10trn, the cut is a mere “drop in the ocean”.

The world’s second largest economy achieved GDP growth of 7.4 per cent in 2014, surpassing the majority of expectations, but it still represented the lowest reading in almost a quarter of a century.

But in spite of the Bank’s efforts, the outlook for growth remains stilted in 2015.

Nitesh Shah, associate director research at ETF Securities, says: “Both the World Bank and International Monetary Fund have downgraded their 2015 China growth forecasts to below 7 per cent.

“The message from policymakers in China is that sub-7 per cent growth is acceptable, so long as its reform agenda continues apace.”

These reforms aim to make China’s economy more reliant on consumption rather than high investment.

Mark Williams, chief Asia economist at Capital Economics, believes the consequence of the PBoC’s latest move will be minor but the fact the RRR cut was announced at all and that it applies to all banks, is in itself significant.

“In practice, the RRR is only one of the constraints that banks operate under,” he says.

“For smaller banks in particular, the loan-to-deposit ratio is the chief bar to increased lending. Banks also have to adhere to loan quotas set by the PBoC. As a result, the direct impact of the move on lending will be small.”

Anna Stupnytska, global economist at Fidelity, feels that while the PBoC’s announcement is good news for China’s short-term growth, it could also mean bad news for its longer-term sustainability.

“The action is likely to undermine efforts over the past year to reign in credit, as lower rates will continue to fuel China’s domestic debt,” she predicted.