In China, focus of monetary easing turns to surgical strikes
Instead of turning the liquidity sprinkler on full-throttle for the whole garden, the central bank is aiming its hose at specific parts
After years of emergency policymaking by counterparts in the United States, Japan and Europe, it is the People's Bank of China's turn to innovate.
Unlike the Federal Reserve, Bank of Japan and European Central Bank, which unleashed unprecedented quantitative easing through central government bond purchases to revive credit growth, the PBOC is pursuing a more measured approach.
While it has taken some broad easing steps, including two interest rate cuts, the central bank still requires commercial banks to park almost one in five yuan of deposits at the PBOC. The benchmark lending rate stands above 5 per cent, giving governor Zhou Xiaochuan the kind of firepower Janet Yellen may never see in her tenure as Fed chairwoman.
Instead of turning the liquidity sprinkler on full-throttle for the whole garden, the PBOC is aiming its hose at specific parts. The latest innovations include plans to bolster the market for local government bonds and the recapitalisation of policy banks so they can boost lending to government-favoured projects.
The strategy is all part of a high-wire act by President Xi Jinping and Premier Li Keqiang to avoid the type of credit crunch and growth slump that afflicted the US and Europe while still reducing debt in an economy that over-relied on investment to drive growth. As China continues to slow, economists are betting more conventional easing will be needed.
"The PBOC is again looking for ways to channel financing to preferred destinations while containing overall financing," said Louis Kuijs, Royal Bank of Scotland Group's chief Greater China economist.
"While it seems catchy to say that China is now joining the bandwagon with its own form of QE, in my view the differences in circumstances, nature and objectives are too large to credibly make that case."
Policymakers have sought to bolster credit for small and medium-sized enterprises, and borrowers supporting the goals of the communist leadership, such as the One Belt, One Road initiative developing infrastructure along China's old Silk Road trade routes.
Borrowers in heavy-polluting industries and speculative real estate are in areas of the economy Xi and Li are seeking to deleverage.
"The biggest challenge facing the PBOC is whether it can substantially lower firms' funding costs without directing credit to overcapacity sectors and unviable firms, leading to another credit boom," said Li-Gang Liu, the chief Greater China economist at Australia & New Zealand Banking Group. "It will have to strike a balance between outright easing and targeted easing."
In Japan, the US and Europe, central bankers turned to large-scale asset purchases as they ran out of interest rate cut ammunition.
For China, "there are many usable tools" open to the PBOC, said Ma Jun, chief economist at the central bank's research bureau. "There will be specific arrangements for local government debt swaps, and these arrangements will not lead to market liquidity tightening."
Along with reserve requirement ratios for banks' deposits, the setting of benchmark lending rates and money market operations, the PBOC's toolkit now includes more surgical armaments. One of them, the pledged supplementary lending (PSL) programme, was used last year to channel funds to building low-cost housing, via the state-owned China Development Bank.
Through what was reported by local media to be three-year funding, the PBOC offered credit at terms about 1 percentage point below market rates. The central bank also maintains re-lending facilities, where it accepts collateral from banks in return for fresh money that can be used for new borrowing.
Officials are now considering expanding the PSL to help local government debt purchases.
With capital flowing out of China, an exchange rate appreciating against some of the nation's top trade partners and a sinking inflation rate pushing up the real cost of borrowing, there may be little choice but to turn on the garden sprinkler. The government set a growth target of about 7 per cent this year. The International Monetary Fund forecasts less than 7 per cent.
"The belief many hold that China is growing below its potential will prompt the PBOC to provide more easing to underpin the economy," said analyst Angela Beibei Bao at Rhodium Group.
Bolstering calls for additional policy easing: a measure of the broad money supply at the end of March was the second-weakest since at least 1996, after the level reached in January.