Dividends and China’s change in reserve requirements ratio shows largest economies remain fragile

If you watch what happens in the Senate as they debate whether the government should spend money on the economy, you will hear different views. One wonders if the views are tied to the political party the Senator talks about or whether the Senator actually examines their state and determines what the majority of their citizens need and what kind of society we should have. COVID has not many things, but one thing it does show are there are inequities in the system and some of them seem to be institutional in nature.

One method to know if the amounts being discussed are too big or not big enough is to examine what other countries are doing. In an article by Marc Jones and Tom Arnold of Reuters, China’s leadership made a decision to spend one trillion yuan or $192.3 billion boost to the economy.

The People’s Bank of China (PBOC) cuts its reserve requirement ratio (RRR) by 50 basis points. The policy ends 9 months of gradual policy tightening by authorities eager to prevent credit growth getting out of control.

Analysts at Morgan Stanley believe this was a shift from countercyclical to an easing bias.

UBS’s head of emerging market strategy Manik Narain said the move was fine tuning rather than a screeching U turn by the PBOC. About 400 billion of the one trillion the RRR is estimated to be worth to be used to repay existing PBOC’s medium term lending facility funding; while 700 billion yuan of tax payments are also due soon.

From a global perspective, it was a reminder that reeling in COVID support measures is not going to be a smooth glide for anyone.

Many China watchers believe pent-up COVID demand has peaked and growth rates will be more moderate. The economy is expected to grow at 8%.

Linking to dividend paying stocks, many economies around the world operate in similar fashion and they try to help the people in the country. Rebounding from COVID is not going to be equal and government bankers have to take that into consideration on what they can do and should do. Moderation is generally to be expected.

There are more questions than answers, till the next time – to raising questions.

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