Soft furnishing

China stealth stimulus may slip down back of sofa

As China's economy slows, its authorities must think ever faster. A 500 billion yuan ($81 billion) injection of central bank funds into the country's biggest five lenders - reported by online media group Sina on September 17 - is unusual and symbolic. But in figurative terms it may just slip down the back of the sofa.

If life were like textbooks, the People's Bank of China's money could go a long way. Banks would use it to create new loans and deposits, which would then flow around the system. Since lenders mostly have to keep around 20 per cent of their deposits on tap at the central bank, the real firepower might be around 2.5 trillion yuan, assuming banks could find enough people who want to borrow. Such a stimulus would be the equivalent of 28 per cent of last year's total new lending.

China's dysfunctional setup is very different, however. Funding can go in, but doesn't always go around. Banks tend to hoard cash, which isn't so surprising when the growth in deposits increased at its slowest rate since at least 1997 in August. Liquidity becomes precious when many borrowers aren't paying back loans on time. It is even scarcer ahead of a week-long October holiday when demand for currency is high. If the new funds don't multiply, they will equate to less than one month's average new lending.

Besides, the facility is likely to last for just three months - too short to go to productive use. The PBOC's main motive may be to help tide companies over and keep money market rates low. Slowing demand is putting intense pressure on corporate cash flows. While China still enjoys a large trade surplus that brings in capital, money is leaving through other channels. Foreign investment has slumped. Companies can pay each other with IOUs, as many do, but not forever.

China's central bank is keeping its real motives murky. It has no obligation to disclose the use of the "standing lending facility" until December. The secrecy may be intentional. Doing something more concrete, like lowering interest rates, might look like a sign of genuine concern. For now the tone is of doing a little, saying less and changing almost nothing.