USD-CNY weekly over the past five years.
Crunch Time In China?
China: foreign exchange reserves are decreasing again, but the PBoC balance sheet keeps growing In short, the PBoC is certainly not overly "tight," but it is also not as accommodative as it would have to be to egg on credit and money supply growth in China forcefully.
This is evidenced by the year-on-year growth rates of China’s monetary aggregates M1 and M2: China, y/y growth in the monetary aggregates M1 and M2.
If one looks carefully, by the time the market scares occurred in 2015 and early 2016, M1 was already expanding sharply again – in other words, it was the lagged effect of the previous slowdown in monetary growth rates that began to impact financial markets.
This could be a sign that bankers are becoming concerned about the pool of real funding and the ability of borrowers to repay their debts.
Of course, everything suggests that all it would take to make them change course is a nudge and wink from above, but there are always those pesky "costs" – and if the concerns of China’s commercial bankers are legitimate (we would suggest they are), then such a decision could easily lead to disaster right away.
Currently, the PBoC’s comparatively easy stance with respect to MRRs certainly seems at odds with the pace of yuan loan growth in China: China’s minimum reserve ratio (MRR) has just been pushed to the lowest level since 2008, but bank lending growth continues to stagnate.
China’s stock market has only experienced a mini echo bubble after the GFC, which mostly took place between 2014 and 2015.
Patience seems definitely advisable at this juncture, especially as developed market stock markets currently look as though they want to fall out of bed with a big thud in order to play catch-up.