The Li Keqiang Put

Beijing (and China broadly) likely continues to benefit from the government's growth-and-reform balancing act. Source: Feng Li/Getty Images.

"New normal China is less interested in growth rates and more interested in quality and efficiency of growth: pushing forward reform, adjusting structure and trying to benefit the people." So said China's state-run media in a piece called "No Need to Hype China's Weak Figures," published Wednesday after a string of dismal (by Chinese standards) data and quite in keeping with what Premier Li Keqiang said at last week's World Economic Forum: "We are restructuring instead of expanding the monetary supply." He also said growth was still in a satisfactory range despite some noticeably weaker figures in August. And yet, on Wednesday, the top headline on state-run China Daily's English language website was this: "PBOC Injects $81b into banks." Then, on Thursday, the PBOC cut banks' short-term borrowing costs. All of which smells a lot like monetary stimulus. Yes, it seems China is sticking with its standard approach: Talking up reform efforts and trying to manage folks' expectations while quietly ensuring the economy has just enough oomph to meet their target.

Most observers expected some sort of stimulus after the recent rash of seemingly dismal data. August industrial production slowed sharply to +6.9% y/y-good by developed-world standards, but China's lowest since 2008. Fixed investment slowed to +16.5% year-to-date growth. Retail sales growth slipped back to +11.9% y/y, fully reversing the mid-year bump up. Credit growth improved from July's depths, but not hugely, heightening calls for monetary stimulus in the form of a rate cut-calls a widely reported state-run media editorial called evidence of "distrust in reform" Tuesday.

That last bit likely explains the PBOC's actions. Wednesday's cash infusion amounted to RMB 500 billion ($81 billion dollars) for the country's five biggest banks (RMB 100 billion each) via three-month, low-interest loans. At least, that's what China Daily said, sourcing Sina.com, which originally leaked the move. The PBOC didn't confirm or announce anything. When pressed Thursday morning, one member told China's state-run news agency the bank wouldn't "resort" to full-on stimulus. Yet that same morning, the PBOC lowered the 14-day repo rate by 20 basis points to 3.50%, freeing up yet more liquidity.

Now, far be it from us to pretend we know what goes through Communist central bankers' heads. But it sure seems like this is an attempt at launching some stimulus while maintaining plausible deniability. Rather than cutting the reserve ratio requirement-their traditional method-they're using the Standing Lending Facility, a tool regularly used to provide extra liquidity ahead of national holidays, when cash is in high demand, and when banks are scrambling to meet month-end capital requirements. National Day-a weeklong festival-is right around the corner, as is quarter-end, so the timing is a wee bit interesting. As is the fact RMB 500 billion dwarfs your typical pre-holiday injection. The repo rate cut is also a sly move-a way to guide interest rates down without actually cutting them. Again, there is zero way to know for sure, but there is a strong circumstantial case that this wink-wink-nudge-nudge double-secret stimulus is their way of goosing growth some without appearing to defy past statements or react hastily to wobbling indicators. Appearing to the locals, that is-it seems safe to say the cat is out of the bag outside their carefully controlled media ecosystem.^[i]

Not that this is really an about-face, though. The RMB 500 billion banks received is about what they'd get from cutting the RRR half a percentage point-and it's in line with the size of other recent targeted stimulus measures. Those programs targeted lending to small businesses and the agricultural sector, and word on the street is Wednesday's new cash is intended for the same groups-in keeping with Li's recent remarks that where liquidity goes is far more important than having a bunch of new money sloshing around. Plus, this mini stimulus is happening alongside continuing economic reform. They aren't turning away from long-term structural changes for the sake of a short-term boost. Reading between the lines of Li's WEF speech, it seems fairly evident he's trying to get his people used to slower growth and more market-oriented measures (at least, as market-oriented as you can get in China). Obviously, they still have a vested interest in keeping growth steady, lest the masses get antsy and revolt, but it seems the floor is getting incrementally lower, and that's not a bad thing-it probably helps guide China's economy on a more sustainable path for the long term.

In short, this week in Chinese news pretty much represents the status quo. Softening growth, no hard landing, and continued reforms. The delicate balancing act between growth and reform appears on track-and that's what ultimately matters for global investors. A slowing, reforming China is a good thing for the world.