Nov 30 came with the announcement of a five-basis-point cut in the bank reserve requirement ratio (RRR) to 21%. The move will release about RMB390 billion ($79 billion) in available lending. This follows earlier moves to make lending more available to small and medium enterprises, which are important drivers of China’s growth. Two weeks ago, the central bank cut the RRR for five rural banks in the eastern Zhejiang province. It was a leading signal of a change in policy implementation. The RRR cut signals a shift away from the concentration on inflation.

 

The slowing in the property market contributed to the weaker Chinese PMI. Home prices fell, as did property sales. The manufacturing segment has seen significant slowing, with widespread factory closings or downsizings on the horizon. Autos, steel, shipping and many manufacturing or related industries are also feeling the stress. It is clear that the pace of growth in domestic demand is not enough to provide a counter-veiling force to the contraction in the export markets, particularly in the eurozone. The banking and finance industry has contracted in line with the general slowing of the economy and slower lending.

 

The coordinated central bank action on the RRR, designed to boost liquidity and ease strains in financial markets, has taken immediate pressure off the euro. It has also ameliorated the immediate impact of eurozone distress on China’s export markets, although it remains to be seen if this will have a lasting effect. 

 

China has allocated some US$1.7 trillion ($2.2 trillion) for strategic spending in case of another global slowdown. This is not new, but recent statements from Chinese leaders, including Vice-Premier Wang Qishan, suggest two important shifts. The first is a growing acceptance of a global slowdown and the consequent impact on China’s growth. The second is the degree to which China is now more concerned about taking care of its own economy than worrying about rescuing Europe or the rest of the world.

 

China has seen the effects of monetary tightening in the face of inflation and slower global demand, with a steady decline of 14% in the Shanghai Index this year. Injecting liquidity into the economy will come from making lending more available to small and medium enterprises. China has policy options not available to the US, where interest rates are close to zero. China has room to drop interest rates.

 

Equipped with ample reserves and room to move on interest rates and the RRR, China is well positioned to ride out any return of the global economic crisis. The historical support level on the Shanghai Index near 2,300 is the critical support and rebound level. The fall from the 2,400 area on 30 Nov to near 2,320 was very rapid. It is not unusual behaviour, because volatility on the downside is often much greater than volatility on the upside. The index falls more rapidly than it rises.

 

We use the area near 2,300 as the historical support level because this is where the market has developed consolidation in the past. The recent index activity has developed support near 2,320.