China Injects Record $83 Billion to Counter Economic Decline
China’s economy is facing some of its toughest challenges in years. On Wednesday, a day after several Chinese government institutions vowed further stimulus to aid its financial sector, the People’s Bank Of China injected a net $83 billion (560 billion yuan) into open market operations via reverse repo operations — to counter its declining economy.
In an official statement, China’s central bank states:
At present, it is the peak of the tax period, and the banking system’s overall liquidity is falling rapidly.
Unfortunately, the injection has failed to impact the Chinese stocks and money market rates as they closed on Wednesday with little to no change.
China Must Prepare for Economic Difficulties?
While injections are not unusual for this time of the year, this one is significantly heftier than the typical ones and comes after an announced large cut in banks’ reserve ratios. The reduction is expected to free up a total of $116 billion for new bank lending. Chinese authorities have reportedly urged financial institutions to keep supporting struggling firms and even dangled incentives, while banks are concerned over delinquencies after a long regulatory crackdown on risky lending.
“The news is clear—the economy needs help,” Trinh Nguyen, a Natixis economist, told Reuters.
Moreover, according to the same news outlet, a state radio on Wednesday quoted the country’s Premier, Li Keqiang, saying that China must prepare for economic difficulties in 2019 as its financial sector faces increasing pressure.
According to another publication in South China Morning Post, eight of the 12 provinces in China that have reported growth targets for 2019 have updated them downwards. All targets are either the same or lesser than the ones for 2018:
These moves, coming days after the Chinese government released its latest trade data that nearly shocked analysts with an unexpected December drop in exports and imports, paint a clear picture of the dire situation the economy is in.
Better Times Ahead?
Property prices in China remained resilient in December while the construction sector also appears to be slowly picking up due to fast-track approvals of additional infrastructure projects.
Moreover, on Tuesday, several Chinese government institutions pledge new stimulus to support its slowing economic growth while promising that it won’t resort to “flood-like” incentives again. These stimuli result in a rapid increase in growth rates while leaving a mountain of debt behind.
According to Ken Cheung, a senior Asian FX strategist at Mizuho in Hong Kong, “while the (PBOC’s) net injection is big, it’s little versus what a rate cut would release, which is what people in the market are watching for.”
As the US-China trade war continues fueling uncertainty with full force, it is unclear whether the world’s second-largest economy will be able to take control over its rapidly declining economic growth.
Major Global Economies Struggle
The year has seen a rocky start for several other economies. Take Germany for example, whose financial sector, the fourth largest in the world, has also been experiencing a decline for the past 12 months after nine years of consecutive growth.
Besides shrinking car sales and exports to China, Germany’s biggest bank — Deutsche Bank — has also been under scrutiny for corruption and money laundering. Last November, 170 law enforcement officials raided the bank’s headquarters in Frankfurt to look for information regarding the exposed Panama Papers.
Moreover, on Jan 2nd, the European Central Bank took control over Italy’s Carige bank. The event occurred following the resignation of the majority of the bank’s board members. In the statement, the ECB notes that the “temporary administrators are tasked with safeguarding the stability of a bank by closely monitoring its situation.” Amid a struggling Italian economy, the event has raised concerns for another banking collapse in the country.
The US government is experiencing its most extended shutdown period while J. P. Morgan Chase faces the risk of a potential class-action lawsuit due to manipulation of precious metals markets.
The NY Fed recently updated its recession-risk model – up to 21.4% in December, from 15.8% in November and 14.1% in October. The odds have doubled in the past year and haven’t been this high since August 2008. pic.twitter.com/K7wUV6XqKx
— David Rosenberg (@EconguyRosie) January 14, 2019
To top it all off, the NY fed has recently updated its recession-risk model, and it doesn’t look as good as one might think. The number has grown to 21.4% in December, from 15.8% in November, and 14.1% in October.
Whether the global economy will keep thriving under its current and upcoming hardships or cryptocurrencies will come to the rescue, as touted, remains to be seen.
Featured image from Shutterstock.