There are usually ceteris paribus assumptions lurking behind every mistaken impression in economics, including monetary economics. If Central Bank X does Y, where Y is a plus sign it is believed to be “accommodation†or “loosening.†Rarely if ever is there an account of money outside of this condition, except in only the most extreme of circumstances. In the past, that would have been any activity no matter how small at the Federal Reserve’s Discount Window (before it was changed), or the belated and stunted dollar swap lines with foreign central banks.
Quantitative easing was just such a mistake, where policymakers and economists (redundant) wrongfully asserted it was a positive monetary contribution – four times. Removing ceteris paribus from that assumption has the effect of rendering QE as at the very least quantitatively insufficient in total across all four applications, while more important being only one narrow form of wholesale money into which the entire global market was/is starved of all forms.
There has been a similar proposition embedded within commentary related to Chinese monetary conditions. If, for example, the PBOC reduces the rate of required reserves (RRR) for Chinese banks it is by and large assumed to be a further “accommodation.†That is true only in the ceteris paribus sense. As discussed last week, since 2011 that just hasn’t been the case. A reduction in the RRR is, as QE actually was, an ex post facto reaction to private monetary events. The Chinese starting in February 2015 reduced the RRR as the “dollar†shortage directly impacted China’s money supply. It was intended to be a neutral policy action, at best.
That has been the direct claim of the Chinese central bank throughout, and for once we can take them at their word. Monetary policy in China has been since 2011 about one task only – to fill any created funding gaps created by what are called “capital outflows†in the mainstream but are really this unrelenting and variable “dollar shortage.†If the RRR is reduced, it is because the PBOC has judged “dollar†problems sufficiently disruptive so as to merit an increasing RMB policy response in order to maintain that neutral position.
The format of the PBOC replies has not been limited to RRR cuts, nor even rate cuts to its main policy levers. Starting in 2013, the central bank has been adding, and using, several additional tools in order to more precisely manage whatever intended policy stance; neutral or otherwise. The Standing Lending Facility (SLF) was inaugurated in early 2013 and used pretty extensively almost straight away – 2013 was, if you recall, not the best year for Chinese monetary conditions. The SLF is akin to the Fed’s Discount Window.
