What monetary stimulus?
Today’s Bloomberg reports that China instituted a new program of monetary stimulus:
China’s central bank unveiled a broad package of monetary stimulus measures to revive the world’s second-largest economy, underscoring mounting alarm within Xi Jinping’s government over slowing growth and depressed investor confidence.
But is this what actually happened? Here’s how the exchange rate for the Chinese yuan responded to Monday’s news:
Note that this is actually the yuan price of dollars, so the sharp fall indicated an appreciation in the yuan. The flat stretch is the weekend period, when markets were presumably closed.
I cannot be certain, but it looks to me like the markets initially treated the news as monetary stimulus, and then sharply reversed course. Michael Pettis has argued that China’s monetary policy has become intertwined with credit policy.
China’s financial system today and Japan’s then have been structured in ways such that monetary expansion results mainly in credit expansion that, for well-understood institutional reasons, is directed mainly into the supply side of the economy.
If so, the markets may have treated this as more akin to fiscal stimulus than monetary stimulus. Note that currencies generally depreciate when there is unexpected news of monetary stimulus, and currencies often appreciate on news of fiscal stimulus (at least in countries where there is little fear of fiscal default.) The Bloomberg article provides support for the view that this might have been credit easing more than monetary easing:
Those moves were followed by a slew of other announcements that fueled gains in China’s beleaguered equity market. The central bank chief also unveiled a package to shore up the nation’s troubled property sector, including lowering borrowing costs on as much as $5.3 trillion in mortgages and easing rules for second-home purchases.
Another article in Bloomberg suggested that China is in recession:
China now has all the symptoms of a “balance-sheet recession”: a protracted period of deflation, property market declines, and a debt overhang. And, just as in Japan, this has followed an amazing period of growth.
I don’t like the term “balance sheet recession”, as these are simply tight money recessions—periods of slowing NGDP growth caused by a tight money policy. The property price declines and debt overhang are a symptom of tight money. In a recent blog post, I suggested that China needed monetary stimulus. I suspect that what they got is closer to fiscal stimulus.
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