Financial Injection by China: $83 Billion to Counter Economic Decline

It’s no secret to anyone that despite the record growth in GDP, China is facing some issues.  The last few years have been quite challenging and on January 16^th, the People’s Bank of China made a big move. The bank gave a huge 560 billion yuan (around $83 billion) financial injection to open market operations via reverse repo operations.

As usual, the bank’s official statement was short and direct:

“The present moment can be viewed as the peak of the tax period. This means that the banking system’s overall liquidity is falling in alarming rates.”

Despite most Chinese predictions, the financial injection did not have the desired impact. Chinese stock prices continued to decline in price. It almost felt if the financial injection did not happen at all.

This financial injection is not a unique event

While it’s not unusual for the injection to happen around this time of the year, this one is surprising because not only of its size, but also because it comes after an announce large cut in banks’ reserve ratios. This reduction is expected to free up up to a total of $116 billion for new bank lending.

There are already instructions from government officials to financial institutions to keep up the support for struggling firms.

Trinh Nguyen, a Natixis economist told Reuters that:

“There is no debate on the matter – the economy needs some help.”

China’s Premier Li Kequiang also stated on January 16^th that the country must make preparations for 2019. Accoring to Kequiang, the next year will have many economic difficulties as the financial sector is bound to face an increasing amount of pressure.

The South China Morning Post also states that eight out of twelve provinces in China have reported growth targets for 2019 have new updated information which points downwards.

China is by no means the only country with a rough start to the year. Germany’s financial sector is the fourth largest in the world and it has also been experiencing a steady decline for the last year. This decline comes after 9 years of consecutive growth.

Shrinking car sales, less exports to China and Deutsche Bank being accused of corruption and money laundering are all factors which have contributed to the decline. January 2^nd, saw the European Central Bank (ECB), taking control over Italy’s Carige bank. Regarding the issue, ECB satates that the newly appointed temporary administrators are tasked with safeguarding the stability of the bank by closely monitoring the situation.

The United States is not out of the picture as J.P. Morgan Chase faces the risk of a potential class-action lawsuit due to manipulation of precious metals markets. To make things even worse, the NY fed has recently updated its recession risk model and the new version does not look pretty. The number is now pointing towards 21.4% from 15.8% in November and 14.1% in October. There is no doubt that this year will be very important for the global economy.

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