Thursday, January 19, 2012

Signs of China's monetary stimulus

Unlike its Western central bank counterparts, whose options are quite limited, China has numerous "monetary levers" the authorities can push in order to stimulate growth. Here are a couple of recent actions:
  • China Banking Regulatory Commission has postponed the implementation of new capital adequacy requirements, which was scheduled to go into effect this month. 
  • The risk weights of corporate loans to small businesses will be lowered to 75% from 100% for banks and the risk weights of loans to "micro-cap" firms may be cut to 50%.
 As inflation stabilizes and property markets correct, the flexibility will increase. 

China's CPI

Global resource markets are taking notice as they become the beneficiaries of further stimulus and stabilization of China's demand for resources. The impact on resource markets is already visible in the SPDR Global Natural Resources ETF (GNR), which is up some 11% from a month ago.

GNR price (Bloomberg)
A number of risks remain for China, but the authorities there can continue to tap a tremendous monetary "tool kit" to further stimulate growth.

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