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China may start injecting liquidity into the economy

China may start injecting liquidity into the economy

China may start pouring liquidity into the economy to maintain growth in the second half of the year, and this could have a positive effect on Chinese stocks.

Top leaders of China at the Politburo meeting announced targeted support for the economy, as risks to growth increase.

China's Manufacturing PMI was released yesterday, reflecting signs of a slowdown in economic activity. China's production grew at the slowest pace in 16 months.

The new coronavirus outbreak is of great concern for continued growth in China's economic activity. China is facing the Delta option and the government is trying to stem the spread by imposing restrictions that could slow the economy down.

Given the already existing factors of slowing economic activity and the government's announcement of support, it is likely that the Chinese government will have to increase its bond issuance to support the economy. The increase in bond issuance will force the Central Bank of China to ease monetary policy and increase liquidity in order to control the rise in bond yields.

But how much will the People's Bank of China increase liquidity, and how will it help investors? If we take into account the past statements of the Central Bank of China that monetary policy will remain "flexible", then huge injections can not be expected. The People's Bank of China will strive to control excess liquidity in order to avoid rising inflation, although even here the Central Bank of China has somewhere to scatter, since China does not have strong problems with rising prices.

The People's Bank of China will continue to soften monetary policy in the old footsteps, through reducing the collateral for banks' reserves. But it is also possible that if the economy needs more liquidity, then there is room for lower interest rates due to low inflation in the country.

The increase in cash liquidity is likely to help the sagging Chinese companies after the regulatory crackdown to find support and restore investor interest.

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