The market has recently taken relief from the decision by China to lower the reserve requirement ratio (RRR) as well as the signal that it will be the first of a series of cuts. Monetary easing in China, the notion goes, is bullish for risky assets.
This is certainly true in so far as goes liquidity is concerned. In an economy where the authorities keep a tight control over end loan supply through quantitative quotas banks’ reserve requirement is a very effective tool to control liquidity. Our own quantitative analysis suggest a strong effect from lowering the RRR to an increase in the money supply.
The real story however is that the shift comes in response to a sharp slowdown in both domestic and external demand in the first quarter of 2012 and thus it seems that investors may have taken too much comfort in the strong Q4-11 GDP print.
Exports slumped in January sliding to a negative growth rate on the year.
The 6m change of the main coincident index declined further for December 2011 and there is little indication of an upturn.
There is, of course, considerable uncertainty surrounding the sharp decline in export activity as Chinese New Year celebrations (and the subsequent reduction in working days) will negatively bias the numbers. As celebrations happen different times each year, standard YoY comparisons won’t weed out the seasonal bias.
A recent interesting piece from Alistair Thornton (Global Insight) suggests however that if we compare January 2012 with previous periods of seasonal trickery, the data still looks bad.
Over the past decade, four previous years have seen a January Chinese New Year preceded by a February holiday—2001, 2004, 2006, and 2009. January 2012′s trade performance was worse than all but 2009
In addition, the preliminary reading from the February flash PMI suggest that manufacturing contracted in the two first months of 2012 which adds a dim light on the first quarter for the economy as a whole. Coupled with the fact that the narrow measure of money M1 has also collapsed indicates a tough time ahead for the Chinese economy.
Liquidity conditions are generally tight in China which is also why the PBoC is now moving to ease liquidity conditions through cuts in the RRR. According to preliminary reports, FX reserve growth returned to positive territory in January but overall growth is still weak. This is confirmed by sluggish growth in all monetary aggregates.
In the meantime and despite the visible change in monetary stance towards more easing it is not clear cut to us that the reigns in the property market will be let loose. Local authorities in Shanghai recently eased regulation to allow residents to buy a second home which is seen as an overall measure of easing as the inability to buy second homes has been one of the main tools used by China to halt property speculation. However, it is not at all clear that this is a reflection of country wide policy. As recent as the 12th of February prime minister Wen Jiabao affirmed the country’s tough stance and commitment to bring real estate prices further down.
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