09 October 2018
Bob Cunneen, Senior Economist and Portfolio Specialist
China's economic growth vs Reserve requirements
Sources: Thomson Reuters.
China’s economy is under pressure. The trade war with the United States has intensified and shows no signs of a ceasefire. Tariffs have now been announced for US$250 billion of Chinese exports into the US. This should curb China’s export growth.
For China, this trade war comes at a particularly challenging time. Economic growth had already decelerated to only 6.7% in the past year to June 2018 (blue line). This is China’s slowest economic growth since the Global Financial Crisis from 2007/09. China’s share market has also had a tough year with the MSCI China Index down a painful -15% so far in 2018.
In response to this threat to China’s economic growth and the share market, China has started to relax monetary policy. The central bank has been pumping extra cash into the financial system since May to lower interest rates. Now the central bank has decided to cut bank’s reserve requirement by 1% beginning on October 15 (red line). This will allow the banks to hold less funds in cash and government securities, and thereby provide more credit to the economy. However by turning on this money tap, the risk is that some borrowers will eventually drown in debt. So China’s current drive to stabilise their economic growth could ultimately come at the expense of future financial instability.
This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) group of companies (“NAB Group”), 105–153 Miller Street, North Sydney 2060. An investment with MLC does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. MLC believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). MLC relies on third parties to provide certain information and is not responsible for its accuracy, nor is MLC liable for any loss arising from a person relying on information provided by third parties. Past performance is not a reliable indicator of future performance. This information is directed to and prepared for Australian residents only. MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.