China’s economy is nowhere near recovered from 2020’s steep recession, yet, contrary to textbook demands, the Chinese central bank is winding down its support. This is especially important given that monetary policy last year hadn’t actually been all that supportive to begin with (see below). The two major money outlets, currency and bank reserves, were allowed a noticeable yet only partial detour upward despite the country facing its most severe setback in memory.
Unlike most characterizations, China’s monetary situation is very much like its economic situation. Things have clearly changed and they aren’t going back. This puts an entirely different spin on that country’s reported “no sharp turn” policy.
The PBOC’s activities merely confirm what top officials have already said repeatedly – this is it, as good as it’s going to get. Whatever comeback the country’s economy has managed, leadership has proclaimed it having reached purported potential. In light of that judgment, what the central bank is doing with its balance sheet makes sense – once you understand how the Communists view their own condition.
Quality not quantity growth means, as it has meant for nearly four years, minor interventions no matter what, those that will take at most a short run position. Nowhere is this more evident than in the money side of the PBOC’s balance sheet which, when confronted by China’s biggest economic slide this side of Mao, throughout 2020 didn’t really provide much cushion let alone support.
And now it’s coming off.
Currency issue was by far the preferred approach; totals were adjusted so that post-COVID there was more being issued faster than any point since 2013. But even in the face of an outright economic contraction, the PBOC throughout 2020 didn’t even come close to its 2009-11 stance in currency. A bit higher/better than 2014-19 isn’t really that much of a change, yet by being so comparatively little highly revealing nonetheless.
In bank reserves, after years of contraction what followed COVID was only a minor, expressively unexceptional shift. Even today, the latest update for April 2021, the balance of systemic bank reserves remains in the same range as 2015-16’s lows. There was hardly any movable imprint at any time during 2020 by monetary policy despite the serious economic circumstances.
And now both currency and bank reserves are being slowly drained. To begin with, each had been able to achieve that much less of a constraining position (compared to 2018-19) if only because of RMB programs like the MLF or SLF – included on the PBOC’s asset line of claims on other depositories (below).
Before 2014 and Euro$ #3, of course, China money had always expanded via the expanse of foreign assets easily flowing into authorities’ collective hands. Since, especially dating back to January 2018 (Euro$ #4), no such luck. The “dollars” haven’t disappeared like they had in 2014 and 2015, but for “some” reason they aren’t showing up even last year during ostensibly reflation if not Jay Powell’s alleged global flood.
For months on end, the PBOC reported practically the same balance of foreign assets – to the point China’s central bankers seemed to be thumbing their noses at the rest of the world being so obvious as to this clear artificiality. In February 2021, the asset level for forex finally rose if only the tiniest bit.
Since, as if to forward the joke even more, the same line in March and April is back to changing so very little from that February departure. At this point, what’s the point? It isn’t gigantic reflation nor is it, more importantly, a sharp turn.
It’s another reason, another monetary set of reasons, to go along with thoroughly disappointing now slowing – in the Western imagination – economic results. There aren’t any or many supposedly reflationary dollars showing up right where they would, if reflation was real and really substantial.
China’s economy continues to modestly rebound contrary to most if not all outside views that had claimed, before April’s “slowing”, it was booming exceptionally. The country’s Communist leadership has repeatedly emphasized how they are fine with this (at least decisively unwilling to do much about it), and the PBOC’s balance sheet further backs up in deed what has already been said repeatedly in communiques and spoken words. Not only do they say they’re at potential, they’re shifting to a monetary policy as if they truly believe it.
With PBOC monetary actions lining up squarely with declared Communist economic intentions, essentially this is the best the world should expect from China, what does that mean for the global economy outlook not in some distant mid-20s state but more immediately for even just the rest of this year? We’re all supposed to be taking off together toward (synchronized) inflation when here’s the Chinese behaving as if what little taking off already happened last year.
Certainly this possibility, along with the two others just mentioned, would add up to a baseline global factor being priced into low bond yields and dollar-based risks no matter how much the US CPI manages for a few months in between. The fundamental ideas behind “transitory” in every real sense have more than Jay Powell’s clueless gaze behind everything.
Perhaps, at least right now, it seems for Japanese (and Caribbean-based) banks they are thinking and likewise acting as if.
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