The central bank will almost certainly have to cut the reserve requirement ratio (RRR) for banks to offset the loss of liquidity, with some analysts expecting action as soon as this weekend.
The PBOC’s latest report calls for “monetary easing”, dropping the usual caveat that measures should be targeted. It is a sign that Beijing is preparing blanket stimulus, despite worries that this could lead to a repeat of the credit excesses that have haunted China since the post-Lehman boom.
The PBOC has already injected $160bn into the China Development Bank for projects.
Hopes that China is at last shaking off a recession in the first half of the year – caused by a combined monetary and fiscal crunch – have once again been dashed by grim manufacturing data.
The Caixin PMI survey slumped to 47.1, far below the boom-bust line of 50 and the lowest since March 2009. New export orders slid further to 46.0 while inventories are rising, a nasty cocktail.
Chart: China manufacturing PMI below forecasts; contraction accelerates – pic.twitter.com/3FhAGnYOiT
— SoberLook.com (@SoberLook) August 21, 2015
Caixin Insight said the bad figures reflect the tail-end of a downturn that has largely run its course as stimulus kicks in. “The economy could be in the process of bottoming out and may start to rebound within the next few months,” it said.
The ructions in China come at a moment when markets are already bracing for the first interest rate rise by the US Federal Reserve in eight years, a move that threatens to tighten the noose further on over-stretched emerging markets (EM) and the commodity nexus.
Danske Bank said the latest rout is worse than the “taper tantrum” in 2013 when the Fed first hinted at tightening, and is quickly turning into a “perfect storm” as the Turkish lira,