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China's most significant easing policy: Relaxing control over local financing platforms
Release time:
22 May,2015
Deutsche Bank economists say that China's easing of controls on local government financing platforms is more significant than interest rate cuts.
Deutsche Bank economists stated: "The market views interest rate cuts and reserve requirement ratio cuts as key signals of China's easing policy. However, Deutsche Bank believes that China's more important easing policy occurred last Friday (May 15), when the Chinese government introduced measures to relax controls on local government financing platforms."
Deutsche Bank economists said that the bank emphasizes the importance of this policy because it represents a 180-degree shift from China's fiscal tightening to fiscal easing, and the market did not anticipate this policy shift by the Chinese government.
Deutsche Bank economists point out three reasons why this policy is more important than interest rate cuts: First, it will more effectively boost investment; second, it reduces the risk of a "hard landing" for the Chinese economy; and third, it is unexpected by the market, thus creating a greater "surprise effect."
Deutsche Bank economists predict that China will cut interest rates again in June and will cut interest rates and reserve requirement ratios again in the third quarter; the combination of monetary easing and fiscal easing will more effectively boost investment in the second half of the year; the bank predicts that China's economic growth will rebound slightly to 7.1% in the second half of the year, while before the Chinese government announced the relaxation of controls on local government financing platforms, the bank predicted that the Chinese economy would decline.
More effectively boost investment
Deutsche Bank believes that China's relaxation of controls on local government financing platforms will more effectively boost investment than interest rate cuts and reserve requirement ratio cuts, as monetary easing policies can help increase credit supply but cannot increase credit demand, especially during periods of fiscal tightening (due to weak private credit demand), while the combination of monetary easing and fiscal easing solves this problem, as the combination increases both credit supply and demand, thus more effectively boosting investment.
Reduce the risk of a "hard landing" for the Chinese economy
Deutsche Bank economists pointed out that before the implementation of this fiscal policy, the bank was concerned that the government's easing measures might be "too late" and the scale might be "too small," which would increase the risk of a hard landing for the Chinese economy; this drastic change in China's fiscal policy stance shows that Chinese officials have reached a consensus that promoting economic growth is the top priority; it is expected that China's policy measures will be more effective and coordinated in the second and third quarters, and will reduce the risk of a hard landing for the Chinese economy.
Unexpected by the market, thus creating a greater "surprise effect"
Deutsche Bank economists said that not only is the Chinese government allowing local government financing platforms to raise funds through bonds and bank loans, but the Ministry of Finance is also allowing local governments to use the ministry's funds to raise funds for projects of local government financing platforms, which surprised the market if funds are urgently needed, and this aggressive easing policy can help promote rapid credit growth.
Source: Huitong.com
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