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Behavioral Macro – Why we misinterpret Chinese RRR cuts

A quick comment on China’s RRR cuts: The underlying mechanics of Chinese RRR cuts and their implications for the country’s monetary policy stance still seem to be misunderstood.

A Chinese RRR cut is NOT like a rate cut in the developed world. And it does not necessarily signify an easing of the monetary policy stance. If you want to understand whether China is increasing or decreasing accommodation you only need to look at one thing: China CNY Monthly New Loans. The Bloomberg ticker is CNLNNEW.

The transmission mechanism of monetary policy in China is too crude at this stage of development to judge the stance of monetary policy by interest rates or reserve requirements. In China, it is all about credit controls. By hook or by crook, the Chinese target a quantity of credit. Whether they get there by regulations, open market operations, rate changes, or moral suasion matters little: the acid test it the rate of increase in the quantity of credit.

via Behavioral Macro – Why we misinterpret Chinese RRR cuts.

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