China Has No Choice

Since the middle of 2011, inflation is no longer a problem for the Chinese. Rather, monetary authorities now have nothing but the opposite concern.

Their patchwork response has been to do the same things only in reverse; for eurodollar outflows, the RRR is reduced. At times, the central bank even refrains from issuing central bank bills. As with the period before 2008, from 2011 to 2013 it didn’t go well.

By the middle of 2014, the PBOC had added new capacities for more targeted bank liquidity, lending windows such as the MLF or SLF.

Here’s the thing, though. Chinese monetary authorities after relying heavily on tools like the MLF in 2016 and 2017 are no longer as much interested in them. They increased the RMB part of the central bank balance sheet to no avail.

This then left the RRR as China’s main monetary line of defense against deflationary forces in 2018 and going forward. Given its obviously poor performance as an inflation-fighting instrument, why would anyone be optimistic on its chances of succeeding now? You could try to make the case that it could possibly be more effective when used in reverse, but that’s just silly.

China’s Communists aren’t silly they are authoritarian monsters, meaning they have to be pragmatic for their own survival especially where economic growth (the peasant to the middle-class pipeline) is concerned.

China’s Premier Li Keqiang announced today that the national growth target for 2019 was reduced to a range between 6.0% and 6.5% real GDP expansion. This is lower still than 2018’s mandate for “about” 6.5%, which came in as expected at exactly 6.5%. What are the chances China’s GDP sees the top end of its newly set corridor? If the bottom, this would be the lowest growth since the eighties.

Perhaps a significant sign, China’s Communist leadership appears to have given up entirely targeting both retail sales growth and fixed asset investment.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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