The Rising Influence of Rising Affluence

[DewDiligence]

More re potential fiscal/monetary stimulation of China’s economy…

http://online.wsj.com/article/SB10001424052702304203604577397613434322778.html

The instinct for the government will be to push the stimulus button, encouraging the banks to lend more. That's always worked in the past. This time it might not be so straightforward.

China's monetary policy makers have already been working hard to ease liquidity conditions. One week repo rates have come down to 3.2% this week, from highs above 5% at the end of February—that makes it easier for banks to lend. Yet new loans in April totaled 681 billion yuan ($107 billion), down from 1,010 billion yuan in March.

This points to the depressing conclusion that despite easing credit conditions, bank customers do not want to borrow.

China's government is not out of options. The fiscal position remains conservative, with the government running a surplus year to date. Low public debt mean there is scope to turn that around, with higher government spending buoying demand.

Falling inflation—with the consumer price index edging down to 3.4% year-to-year in April from 3.6% in March—also means room to do more on the monetary front.

Given ample liquidity in the system already, a cut in the reserve requirement ratio—freeing up still more funds to lend—would be a largely symbolic show of support. If April's gloom continues further into the second quarter, a cut in the interest rate to buoy loan demand could be on the agenda.