China finally fires its stimulus bazooka

Confronted with an intractable property slump, deepening deflation, and failing economic targets, Beijing finally abandoned its piecemeal stimulus approach. In a synchronized press conference on 24 September, the People's Bank of China unveiled a sweeping package of monetary easing: slashing reserve requirements by 50 basis points, cutting benchmark lending rates, lowering existing mortgage rates, and providing RMB 800 billion in direct liquidity to backstop the equity market.

The Monetary Liquidity Injection

Domestic Chinese equities experienced their most explosive single-week rally in sixteen years as trading desks scrambled to cover shorts. Yet seasoned macro observers recognise that monetary easing alone cannot cure a balance-sheet recession. Lowering borrowing costs does not manufacture consumer confidence when households are traumatised by falling home values. Without massive, direct fiscal transfers to households, the stimulus bazooka will misfire.

Beijing’s monetary stimulus ignited a breathtaking equity rally, but flooding the financial system with cheap credit cannot cure a consumer confidence crisis rooted in property deflation.