New Monetary Stimulus Measures in China: What Really Happened?

Recently, Bloomberg reported on China’s central bank unveiling a comprehensive package of monetary stimulus measures aimed at reviving the country’s economy. This move comes amidst concerns over slowing growth and dwindling investor confidence within Xi Jinping’s government.

However, the response of the Chinese yuan exchange rate to this news tells a slightly different story. The graph depicting the yuan price of dollars shows an initial appreciation in the yuan followed by a sharp reversal. This unexpected market behavior raises questions about the nature of the stimulus announced by the central bank.

According to Michael Pettis, China’s monetary policy is intricately linked to credit policy. This means that monetary expansion often translates into credit expansion, primarily directed towards the supply side of the economy. The market’s reaction could indicate that the stimulus was perceived more as fiscal easing rather than traditional monetary stimulus.

Supporting this view, the Bloomberg article highlights additional measures announced by the central bank to support the real estate market, such as lowering borrowing costs on mortgages and easing rules for second-home purchases. These actions suggest a focus on credit easing to stimulate specific sectors of the economy.

Another Bloomberg article suggested that China might be in recession, displaying symptoms of a “balance-sheet recession” characterized by deflation, property market declines, and a debt overhang. However, this could simply be a tight money recession, where slowing NGDP growth is a result of tight monetary policy.

In a recent blog post, it was argued that China may require monetary stimulus to counter these economic challenges. The recent measures taken by the central bank, although labeled as monetary stimulus, appear to lean more towards fiscal stimulus in practice.