China’s version of the Lehman crisis is unfolding – Citizen Watch Report

Today is definitely a day to look East as something we have been waiting for has occurred. For several years now we have been observing the consequences of the way the Chinese property sector has turned from boom to bust. This morning one could say that the Chinese cavalry has arrived. Here is Mr. Pan Gongsheng, Governor of the People’s Bank of China.

In terms of the total amount of monetary policy, we will comprehensively use a variety of monetary policy tools, such as lowering the reserve requirement ratio, reducing the policy interest rate, and guiding the loan market benchmark interest rate downward, to create a good monetary and financial environment.

This is a pretty comprehensive move starting with the usual Chinese policy of raising the quantity of money via encouraging banks to lend in response to a lower reserve requirement. As well as acting on the money supply directly they are reducing a range of interest-rates as well. The precise details are below.

In the near future, the deposit reserve ratio will be reduced by 0.5 percentage points, providing about 1 trillion yuan of long-term liquidity to the financial market; depending on the market liquidity situation this year, the deposit reserve ratio may be further reduced by 0.25-0.5 percentage points. The central bank’s policy interest rate will be reduced, that is, the 7-day reverse repurchase operation rate will be reduced by 0.2 percentage points, from the current 1.7% to 1.5%.

It is very Chinese to say “in the near future” and is their version of the Japanese culture of “face” as they try to give the impression that this is not urgent. They are hoping that the 1 trillion Yuan will wash around the economy and if not are willing to add another trillion. By contrast the policy interest-rate move is more minor.

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