China’s central bank said it would cut banks’ reserve requirements on Friday, after a set of disappointing trade data. Effective May 18, it will cut the reserve requirement ratio for banks by 50bp to 20%, which it hopes will free up lending and stimulate a recovery — or at least avert a hard landing.
It will likely need to do much more, and soon, given the terrible data. Analysts surveyed by Bloomberg were expecting year-on-year import growth of 10.9% and export growth of 8.5% — far higher than the actual print of 0.3% and 4.9%, respectively.
The slow growth in imports helped China’s trade surplus to beat expectations, but that is hardly a positive sign. With a return to recession in the eurozone, China is more reliant on domestic demand than ever.
There was plenty of other bad news. Industrial production also missed estimates, with year-on-year growth during April of 9.3%, compared to expectations of 12.2%. Power output grew just 0.7%, down from 7.7% during March, while fixed asset investment and retail sales also missed.
Sell-side analysts have largely welcomed the move to cut reserve requirements, but it is a fairly weak response in the face of such bleak numbers. It will mean banks have more money to lend, of course, but it will do little to make their customers more keen to borrow it.
“The constraint to growth last year was policy restrictions, but now it has shifted to demand limitation,” said Credit Suisse analyst Dong Tao in a note last month. “Outside of local governments’ infrastructure projects, the interest in making investments now in the private sector is low. Among the infrastructure projects, although some construction activities have been resumed, we have observed few new projects getting started — unusually low for the second year of a five-year plan cycle.”
Indeed, some of the worst news came in the April figures for new loans, which at Rmb682 billion were Rmb100 billion shy of analysts’ estimates.
Even the Chinese seem to agree that freeing up lending is a small gesture. After the last reserve cut in March, Zhou Xiaochuan, China’s central bank governor, was keen to stress that such actions are about hedging changes in foreign exchange reserves and should not be considered monetary easing.
That may suggest additional measures are set to follow. “Thankfully, the downtrend in inflation allows Beijing to do so,” said HSBC in a research note sent out on Friday. “We expect more aggressive delivery of policy stimulus via quantitative easing, substantial tax breaks, fiscal spending and investment deregulation in the coming months to ensure a soft landing.”
Most analysts still expect that China will ensure a soft landing, with the economy bottoming out this quarter, but the risks of a hard landing are rising with each disappointing piece of data.
One worry is the negative feedback between slowing property investment and weak external demand, according to Commerzbank analyst Charlie Lay. “These two forces could augment each other and result in a more pronounced downturn,” he said in a note on Friday. “If the external environment continues to deteriorate and lead to a continued slump in exports, we could see the authorities relax liquidity conditions even further.”
With so many global investors and businesses pinning their hopes on Chinese growth, there is a lot of money riding on an improvement. China bears, meanwhile, are grinning wider than ever, particularly as US data continues to surprise on the upside.