Economic Analysis: Did China Just Add New Stimulus?

The People’s Bank of China (PBOC) has, supposedly,  just launched a new mini-stimulus to help fight the growing headwinds slowing the world’s second largest economy. The new measures are targeted to help support agriculture and boost investment into facilities. They are also aimed to improve environmental measures.

What did the PBOC do today? Simple. They have given commercial banks a larger relending quota. They did this by lowering rates to support the agriculture sector. They also pumped 20 billion yuan ($3.25 billion) to local bank branches to help rural institutions to jumpstart loans. What is relending? It is a monetary tool employed by the central bank in increase commercial bank’s liquidity and help guide credit flows. It boosts lending, which in turn boosts spending, which spurs consumption.

Other tools, included in today’s mini-stimulus, was a push to increase investment in clean energy sources. They aimed to increase investment in public facilities like hospitals, nursing homes and they promised to deliver more on social housing as well as spending more on protecting the environment. These measures should help China reach its target gross domestic product (GDP) growth of 7.5 percent. Are the strong enough?

We have seen many disappointing economic reports out of China as of late. These reports have indicated, strongly, China has hit an economic soft patch. The HSBC Flash PMI fell to 50.3 in August. This was way off the 18 month high seen in July when it came out at 51.7. We expected a print of 51.5. As the government ramps up stimulus packages, like what we saw today, we expect growth to stabilize.

Some economists disagree with what we saw today being a mini-stimulus package. If it was than it is not big enough to even have a marginal effect. These new measures are simply ongoing support for their economy not expected to have any real impact. This is not the first time the PBOC has expanded its re-lending quota. Back in July, they did the same thing by 12 billion yuan to help boost support for small business in rural China. To further support this hypothesis, this is certainly not the first time Beijing has talked about increasing social spending. They have done this before.

To call this, latest round of economic support, anything but routine maintenance is a stretch. To call it a mini-stimulus is a stretch if not an overstatement. Eventually, China will need to enact some form of monetary stimulus to help the economy along. They have not done that yet.