The best way to eat an elephant is one bite at a time. My guess is that this is exactly what China is attempting to do. Monday’s announcement by the PBOC to reduce the Reserve Requirement Ratio (“RRR”) for large banks by 50 bps preceded Tuesday’s weak manufacturing report. Hmmmm…. How coincidental is that?
China’s latest PMI report, as of February-2016, indicates that its manufacturing sector index shrank more than expected to 49.0 vs. January-2016’s previous level @ 49.8. The concurrent release of the Caixin PMI from the private sector also showed a decline to 48.0 from the prior month @ 48.4. The continual contraction in factory activity is now leading to layoffs and this only exacerbates a slow recovery as China transitions its GDP to a more service weighted economy.
So, if going from 17.5% to 17% RRR translates to 700 billion Yuan or $107 billion USD into an economy with a GDP valued @ $10.35 trillion USD, is this enough stimulus injection to positively impact the economy or is it just a mosquito biting an elephant’s arse? My guess is the latter and I expect more QE (quantitative easing) pricks from the bank of China.