China's easing may prop up stocks, but risks rewarding speculators

Sun Jun 28, 2015 5:58am EDT
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By Pete Sweeney

SHANGHAI (Reuters) - China's monetary easing at the weekend was aimed at stopping a stock market stampede, but has some economists worried that policy is being used to prop up an equity rally that was not based on fundamentals and has not done much economic good.

Yet, they have also warned that not taking action could have major impact on investor sentiment and do disproportionate damage to the wider economy.

The decision to cut both lending rates and reserve requirements at some banks on Saturday was seen as almost entirely driven by the need to stabilize Chinese bourses after they lost 20 percent over the course of just a few weeks.

"The government appears eager to maintain a bull market to expand the capital market and reduce reliance on bank lending," wrote Standard Chartered economists in reaction to the cuts.

"Although the use of monetary policy for that purpose is questionable."

Part of the problem is that even by giving investors the impression that the central bank will use monetary easing to stem losses could be seen as encouraging further one-way speculation.

In addition, there's the problem that the rally isn't helping with China's slowing growth. In most economies a bull market is welcomed for its "wealth effect," stimulating investment and spending in other parts of the economy.

The Chinese rally has had no such effect. Even as stock markets saw their net capitalization increase by $7.6 trillion in 12 months to $11.5 trillion - larger that the country's entire gross domestic product in 2014 - retail sales figures have declined steadily, and business investment has stayed weak.   Continued...

A Chinese national flag flutters outside the headquarters of the People's Bank of China, the Chinese central bank, in Beijing, April 3, 2014.   Picture taken April 3, 2014. REUTERS/Petar Kujundzic