Chinese authorities took a huge 100 basis points off the key capital holding requirement for the nation’s banks over the weekend. There are reports today that even more aggressive stimulus is being considered.
In an excellent research note this afternoon, ANZ says the decision by the People’s Bank of China to ease monetary policy risks creating a “black swan” event.
The phrase “black swan”, coined by Nassim Taleb, describes unforeseen but enormously disruptive events in financial markets.
The note from ANZ’s research team says the size and timing of the policy easing “signals that China has entered into an aggressive monetary easing cycle to counter the economic slowdown and the rising deflation risk”.
While ANZ believes the policy easing will help boost China’s property market, along with iron ore prices, the bank also sees the potential for unintended consequences in China’s financial system.
“The aggressive RRR cut will also add fuel to the already red-hot stock market. If there is no further regulatory reform or enforcement, the money released by the RRR cut could lead to a speculative bubble in the stock market, potentially creating a ‘black swan’ event in China’s financial system.”
The potential for an unpredictable disruptive shock out of China is a scary prospect, not only for China-dependent nations such as as Australia, but for the global economy as a whole.
Policy easing, required to boost the real economy, is also increasing the likelihood of an unexpected, large-scale market disruption.
With many market commentators forecasting additional policy easing in the months ahead, including ANZ, it will be left up to the PBoC to manage this increasing risk.
While they’ve managed this juggling act well to date, let’s hope this remains the case.