Chinese economy should stabilize in the next six months

On June 16 2014, the People's Bank of China (PBOC) formally lowered the reserve requirement ratio for qualified commercial banks by 0.5 percent. On April 25 2014, the PBOC had lowered the reserve requirement ratio of county-level rural commercial banks and county-level rural cooperative banks. This was therefore the second time that the PBOC had used this monetary measure.

In the past two months, China's decision-makers have sent positive signals to the market by moving forward with "microstimulation" policies, which have not only addressed the liquidity problem in the short term, but also laid a foundation for stabilizing the economy in a long term.

According to a rough estimation from Shenyin Wanguo Securities, lowering the reserve requirement ratio released about 60 to 70 billion yuan on this occasion. Combined with 60 to 100 billion yuan released on the previous occasion, this means a total of 120 to 170 billion yuan were released.

In the last few weeks, through lowering the reserve requirement ratio, refinancing and other measures, the PBOC has provided sufficient liquidity to the interbank market. Currently, the interbank market interest rate has fallen to its lowest level since May 2013.

The discount rate and the transfer discount rate, both indicators of company level liquidity, are also lower, which suggests that liquidity in the real economy has improved.

According to some analysts, the PBOC is favoring a moderate sufficiency of liquidity overall through lowering the reserve requirement ratio, which means that the basic orientation of the monetary policy has not changed. The key point of the next step will be lowering the financing cost. Along with the implementation of the "microstimulation" policies, the economy will be given a boost. Domestic demand will stop declining and stabilize. With stable aggregate demand, there is every likelihood that the Chinese economy will stabilize in the coming half year.