Quick Update: With its credibility on the line, the Beijing pushes forward easing

Last month Beijing intervened in the stock market and in doing so added to the list another market to support - along with property, credit, and the CNY (see my posting China stock market interventions are a setback to reforms.).  As China's shares went into free fall, Beijing had to step in to maintain its credibility.  The result has been the biggest monetary boost of the year.  The broad RRR was cut 0.50%, potentially unleashing $100 billion into the market for lending, and the lending and deposit rates were cut 0.25%.  Beijing has stopped its targeted easing and unconventional stimulus in favor of a broad traditional cut in rates and RRR.  Its has unloaded its biggest guns to shore up confidence.

With the cuts came the long awaited liberalization of China's deposit rates.  Historically, China controlled the rates banks could pay depositors.  The overnight actions by the PBOC removes some this control, giving the market sway over the majority of bank rates in the economy.  The move was probably a concession to reformers.  Banks will still have political pressure from Beijing when setting rates, but the move will allow more competition in banking.

As mentioned in earlier blogs entries, PBOC easing cycles historically see at least three reserve cuts each cycle.  Many, including myself, expected the cuts to come later in the year, but the stock market declines forced the PBOC to move those cuts forward.

The easing measures have stopped the global market sell off, and should provide some modest support for growth.  But, as mentioned in past blog entries, monetary easing measures have been offset by Beijing's reining in of shadow banking and cleaning up of local debt (see my blog post Reflation Troubles.)  These measures will probably do more for growth later in the year, and have a lower impact than monetary boosts in past years.

The primary growth boost we will see this year - from both fiscal spending that has been slow in arriving and a property market rebound - will arrive this Fall.

Overall, the cuts have been good for stopping the global sell-off, but we should be cautious in forecasting what the cuts will mean for the real economy.  In the near-term, after intervening a second time and putting its credibility on the line again, Beijing will be stuck supporting the markets for some time.