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Published On: Wed, Sep 17th, 2014

China’s PBOC boosts liquidity joining ECB, while US Fed is expected to reduce stimulus

The People’s Bank of China injected funds into China’s largest banks, signaling utmost concern over the economic slowdown, thus joining the ECB; the Fed is expected to announce the successive cut in its monthly bond purchases.

People's Bank of China

People’s Bank of China decided on boosting liquidity as a measure to tackle weakening growth. The central bank injected 500 billion yuan (equivalent to $81 billion) into the country’s largest banks, which is a sign of the utmost concern so far over the economic slowdown.

In the US, following this week’s meeting, Fed Chair Janet Yellen is to announce yet another $10 billion cut to monthly bond purchases, according to economists’ forecasts. Yellen is heading to gradual hiking of interest rates.

The credit expansion in China is based on targeted measures to support growth, not adopting the US broad based stimulus course. The three-month injection term still lets China manage the process of boosting credit demand in the heavily debt-burdened economy. The news of the injection came from an undisclosed source, which means that PBOC does not wish to widely publicize policy easing.

In Hong Kong, bank stocks rallied; the yuan stopped after a four-day slide; one-year interest-rate swaps slumped to the lowest level since June.

China’s most meager industrial output expansion since the start of the global financial crisis and the moderating growth in investment and retail sales, indicated by September 13 data, emphasized risks of the slowdown deepening further. The data came after the second imports drop in a row, and a 40 percent decline in new credit for August; furthermore, indicators signaled a manufacturing pullback.

The PBOC injection is the first clear policy response to the August data, and monetary conditions are expected to loosen slightly. Other similar policies would probably follow, including some acceleration of planned fiscal spending.

The People’s Bank of China is seen to be trying to cut costs in favor of preferred sectors and borrowers without reflating the property sector. But that entails a hazard of a step back from the more market-based credit allocation, which China needs badly.

This month, ECB President Mario Draghi informed of the final round of interest-rate cuts, together with a plan for private owned securities purchases. Draghi is endeavoring to revive inflation in the euro zone. Also this month, in Japan, BOJ Governor Kuroda stated before the Japanese PM that he would do his best to meet the inflation target, going on with the unprecedented easing.

Last week, in China, PM Li Keqiang said the country’s government could not trust monetary stimulus as a tool for boosting economic growth. Yet, he is faced with the constraints of moderating tax revenue gains, like his European and Japanese counterparts.

Before its latest action, PBOC had introduced two targeted reductions in the reserve ratios, on China’s State Council instructions. The first was made in April and applied to certain small rural banks; the second, in June, addressed most city commercial banks and cooperatives in rural areas.

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