China to flood banking system with new liquidity
The selloff in Chinese stocks accelerated Monday, adding pressure on Beijing, which is planning to flood its banking system with new liquidity to offset effects of its recent surprise currency devaluation, according to Chinese officials and advisers to the central bank.
Stocks fell sharply in morning trading, with the Shanghai Composite Index SHCOMP, - 8.49% down about 8%, bringing its losses since its mid-June peak to roughly 37%. Stock markets also were down Monday morning in Japan and South Korea.
The expected move to free up more funds for lending-by reducing the deposits banks must hold in reserve-is directly aimed at countering the effects of a weaker currency, which could send more funds away from Beijing's shores. The moves reflect an economy increasingly failing to cooperate with Chinese leaders' playbook to control the world's No. 2 economy.
Beijing's struggles this summer have spooked many investors into viewing China as a threat to, rather than a rescuer of, global growth. During the financial crisis of 2008 and early 2009, China, with a colossal stimulus plan, acted as a shock absorber. Lately, it is China that is providing the shocks. Over the past week, it has grown clear how dependent a growthstarved world is on China, which accounts for 15% of global output but has contributed up to half of global growth in recent years.
Given this dependency, one reason markets have been so unnerved is that China's economy remains something of a black box. For starters, analysts have long wondered about the accuracy of government economic statistics. And levers pulled by Chinese policy makers can be unconventional. This is seen in Beijing's desire to micromanage the yuan's value, which undercuts its ability to pursue an independent monetary policy because of spillover effects on domestic liquidity.
The cut in bank reserves, which could come as early as this week, would follow several others this year and four interest-rate cuts since November that have failed to juice growth and channel bank lending to the so-called real economy. A key problem is that risk-averse banks continue to favor state-owned companies, eschewing private enterprises with less-traditional collateral and balance sheets. This often leaves entrepreneurs with higher growth potential to fall back on high-interest nonbank financing or go without. Meanwhile, many stateowned companies, already awash in cheap capital, are reluctant to borrow because of overcapacity in various industries.