Wow. China’s PBOC Aggressively Eases via Reserve Requirement Ratio, Mulls QE (LTRO)!

Last night I commented on the proposed plan to rein exploding margin trades in China’s equity markets

This seems like another superficial or political staged attempt to curb or control the stock market bubble that has been going berserk.

Apparently while one regulatory agency may want to control margin trades, the priority of the national government as expressed by the actions of the central bank goes on the opposite direction.

Yet more signs that all has not been well in China, despite what government statistics say. 

The Chinese government has become even more frantic or more desperate to forestall a bursting bubble. 

Demonstrated preference: action speaks louder than words. The action: The PBOC aggressively cuts Reserve Requirements and even considers ECB style QE (LTRO)

First the Reserve Requirements. From Reuters: (bold mine)

China's central bank on Sunday cut the amount of cash that banks must hold as reserves, the second industry-wide cut in two months, adding more liquidity to the world's second-biggest economy to help spur bank lending and combat slowing growth.

The People's Bank of China (PBOC) lowered the reserve requirement ratio (RRR) for all banks by 100 basis points to 18.5 percent, effective from April 20, the central bank said in a statement on its website www.pbc.gov.cn.

"Though the growth in the first quarter met the official target of around 7 percent for 2015, the slowdown in several areas, including industrial output and retail sales, has caused concern," said a report published by the official Xinhua news service covering the announcement.

The latest cut, the deepest single reduction since the depth of the global crisis in 2008, shows how the central bank is stepping up efforts to ward off a sharp slowdown in the economy.

Second, PBOC’s plan to mimic ECB’s LTRO

From Wall Street Journal (bold mine)

China’s central bank is considering taking a page from Europe’s financial-crisis handbook to free up more credit as growth in the world’s second-largest economy slows.

The proposed strategy would allow Chinese banks to swap local-government bailout bonds for cash as a way to bolster liquidity and boost lending, said people familiar with the People’s Bank of China talks.

Adopting the strategy would mark a major shift in the central bank’s money-supply policy and underscore the leadership’s deep concern about missing already lowered growth expectations.

In recent months, China’s leaders have directed the central bank to try to beef up bank lending and lower borrowing costs as the economy slows and capital leaves the country.

But a barrage of easing measures—including two interest-rate cuts since November—has had limited success. Instead of stimulating targeted areas of the economy, such as small businesses, they have helped companies already heavily in debt.

The move also triggered a run-up in China’s stock markets that prompted the top securities regulator last week to rein in speculative stock-trading activities. On Friday, China’s Premier Li Keqiang urged Chinese banks to do more to support the “real” economy.

As I wrote last night, 

Yet despite the economic fragilities, the Chinese government continues to force feed credit into system. The Chinese government appears to either be buying time from a bubble bust or hoping that blowing new bubbles may cure problems caused by previous bubbles

The Chinese government fails recognize that the consequence of the previous (property) bubble has been to engender widespread balance sheet impairments in the real economy. 

So foisting of credit to the financially inhibited economy via intensified easing measures will only signify “pushing on a string” or the inability of monetary policies to entice consumers to borrow and spend.

Instead, the ramifications of such policies will spillover into sectors that has previously had least exposure to credit. And this is what China’s stock market bubble has been about. 

Recent credit growth has suffused to the stock market where borrowed money has ballooned and used to hysterically bid up equity prices even as the real economy has been materially deteriorating.

So the Chinese government basically adapts the current therapeutic government standard in dealing with bubbles: Do the same things over and over again and expect different results. Or solve bubble problems by blowing another bubble.

This marks another sign that record stocks comes in the face of record imbalances at the precipice. 

Batten down the hatches