China to flood bank­ing sys­tem with new liq­uid­ity

The Pak Banker - - COMPANIES/BOSS -

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.

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