Chinese monetary policy seems less effective at boosting growth, says ANZ

China’s monetary policy has become less effective in boosting the nation's growth prospects, even though the country remains behind Japan in falling into the 'liquidity trap' in a 'Japanese fashion', ANZ reported.

The world’s second-largest economy is expected to address yield-chasing behavior given the massive amount of corporate and household cash available. However, aggressive monetary easing has been dismissed in the near term.

High growth in M1 money supply by around 24.6 percent y/y in June cannot be entirely attributed to the sales proceeds of property developers. Financial data of listed companies indicate that other industries are responsible for half of the increase in the cash balance, indicating a structural weakness in the economy.

Moreover, a growth rate of 6.7 percent y/y does not warrant either an imminent RRR or an interest rate cut. The current condition instead favors the use of fiscal policy to stabilize growth, the report said.

"Policymakers are reminded to avoid any potential pitfalls to the Chinese economy," ANZ commented in its report.

Meanwhile, cash-rich Chinese companies are searching for offshore investment, just as the Japanese did in the late 1980s partly due to the strength of JPY in the aftermath of the 'Plaza Accord', an event that led to a series of economic consequences experienced by Japan such as a 'hollowing out" in domestic manufacturing. However, the fiscal condition of China seems relatively favorable compared to Japan.