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Goldman's Take On China's "Stealth QE"

From Goldman's Yu Song:

Domestic media (Sina) reported that the PBOC conducted RMB 500bn of Standing Lending Facility operations with the big 5 commercial banks (ICBC, BOC, BoCOM, CCB, ABC). The reports note that the duration is 3 months and the RMB 500 bn is evenly split among the banks. This amount is roughly the same as a 50 bps cut to RRR for the whole banking system on a static basis (though the impacts of RRR cuts tend to be larger because they have ongoing effects).


There is no official confirmation from the PBOC yet. Still, such an easing would be consistent with our expectation that (1) monetary policy will loosened amid the drastic slowdown in activity growth and falling inflation, and (2) full scale RRR and interest rate cuts are unlikely because they would be viewed as aggressive stimulus (see China: Sharp slowdown in activity in August, September 14, 2014).


We expect monetary conditions to loosen modestly, which will provide some much needed support for demand growth. Other policies may follow. Front-loading of fiscal expenditure is one possibility--a disproportionate share of fiscal outlays (close to 20%) occurs in the last month of the year-- and could reduce recurring criticism of the year-end rush to spend. The government may also step up pressures on government agencies and local authorities to maintain momentum on investment growth. However, we see no indication of these measures yet.


Given policymakers have shown a willingness to loosen in the face of weaker data, we believe growth will rebound in the coming months and the government will be able to reach the "around 7.5%" full year GDP growth target for 2014 (after positive effects of the expected GDP methodology adjustment to include R&D.

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It will rebound... for one quarter, then tumble once more as we explained yesterday in "Why China's Latest Mini-Stimulus Failed Again, In One Chart"  thanks to the magic words: "Credit Impulse"