China’s central bank recently unveiled a broad package of monetary stimulus measures aimed at reviving the country’s slowing economy
The key measures are:
- Lowering the reserve requirement ratio (RRR) for banks by 50 basis points
- Cutting the seven-day repo rate by 0.2 percentage points
- Reducing interest rates on existing mortgages
- Easing down payment requirements for home purchases
Was it a monetary or a fiscal stimulus?
In this article Michael Pettis explains why China’s financial system has been structured in ways such that monetary expansion results mainly in credit expansion.
In China (and Japan from 1960-2000), the financial system is structured differently:
- Credit expansion is directed mainly towards the supply side of the economy.
- Most credit goes to businesses, state-owned enterprises, and government for investment in infrastructure, property, and industry.
- A smaller share of credit reaches households, and even then, it’s mostly used for home purchases rather than consumption.
China’s Unique Situation
- Despite aggressive expansion in debt and monetary aggregates, China has been experiencing low inflation and even deflation in recent years.
- The author argues that this is because monetary expansion in China primarily increases supply rather than demand, contrary to the assumptions of many analysts and policymakers.
- The Chinese banking system is heavily regulated, with credit allocation often directed by regulators rather than market forces.
Is Inflation a Monetary Phenomenon in China?
By: Michael Pettis – Peking University
Will the measures work?
Menzie Chinn in this article discusses whether these policies will be succesful in boosting China’s growth. He argues that China’s economy is facing several challenges:
- GDP growth has decelerated, with Q2 2024 growth at 0.7% quarter-over-quarter (2.8% annualized), well below the 5% annual target.
- Deflation is occurring, particularly at the producer level, signaling slowing growth and potentially exacerbating demand shortfalls.
- The GDP deflator has fallen for five consecutive quarters, reaching -3.8% in Q2 2024.
Despite these measures, Chinn suggests:
- The 5% growth target for 2024 is likely to be missed.
- A quick fix is unlikely, given structural issues and the administration’s focus on political dominance over GDP growth.
- China faces challenges similar to Japan’s Lost Decade and the U.S. real estate bubble, which may lead to a prolonged period of slower growth.
China faces several long-term economic challenges:
- Need to accelerate productivity growth
- Declining inward foreign direct investment (FDI)
- Restrictions on access to foreign technology due to geopolitical tensions
- Demographic issues and potential mal-investment in various sectors of the economy
The article suggests that while the recent policy moves are significant, they are unlikely to drastically change the path of China’s economy in the short term, given the complex mix of structural and cyclical challenges it faces.
China Policy Moves in Context
By: Menzie Chinn – University of Wisconsin–Madison
