SinoInsight 1
According to official figures released on Jan. 18, China’s GDP grew by 6.9 percent and exceeded 80 trillion yuan ($12.5 trillion) for the first time in 2017. The figures suggest economic stability and good prospects.
OUR TAKE
1. We have a less rosy view of China’s latest GDP figures. Recently, the local governments of Inner Mongolia and Tianjin reported fabricating GDP data in 2016 by as much as 30 to 40 percent. China’s regulators are also tightening supervision of the financial sector and strictly investigating local debt issues. And in December, the Xi administration vowed to crackdown on major financial risks. These developments indicate that China’s economy is facing severe problems.
2. U.S. financial policies in 2017 may create a “bank run” effect on China’s economy. Beijing is hence fearful of triggering Black Swans and Gray Rhinos, and causing a disastrous domino effect on the economy.
3. When in a precarious position, the Chinese Communist Party typically projects an optimistic, “all’s-well” image.
SinoInsight 2
On Jan. 17, the People’s Bank of China (PBoC) announced a comprehensive targeted reserve requirement ratio (RRR) cut on inclusive financing, a move that will inject long-term liquidity of about 300 billion yuan.
On Dec. 30, the PBoC suddenly lowered its RRR to big banks by 2 percent for up to 30 days to inject up to 1 trillion yuan in liquidity into the banks.
OUR TAKE
1. We believe that the PBoC is lowering RRR for “inclusive financing” as an excuse to create more liquidity for banks. Because China’s banking regulator recently tightened regulation, financial institutions could substantially shrink their balance sheets and cause a contraction of liquidity in the markets.
2. In our China 2018 outlook, we warned that danger is imminent if the PBoC keeps decreasing its reserves. It’s now only January, and the PBoC has already lowered its RRR.
