Yesterday’s 27 bp rate cut and 50 bp reduction in minimum reserve requirements by the PBoC had the expected impact on the stock market: None.  The SSE Composite declined 0.8% today to close at 2075.  Another day like yesterday and we’ll be testing 2000 once again.

Of course it is unrealistic to expect that the PBoC’s actions should have had an immediate impact on either the economy or the stock market.  The consequences of monetary policies are only supposed to reveal themselves over a several month period, during which time the hope here was that companies will have been given greater access to loans and consequently will more aggressively borrow and invest.  The one-day market reaction was inevitably going to be colored by a lot more than just the immediate consequences on economic fundamentals of the PBoC actions, and I don’t doubt that bad markets overseas didn’t help.

But even over the medium term will the consequences be positive?  I already said yesterday that I was skeptical:

It seems to me that at least part of the reason for slowing loan growth has been corporate reluctance to borrow.  If that is the case, I doubt whether lower rates (let alone lower minimum reserves) will have much impact.  After all it hasn’t been high interest rates that have constrained borrowing in the past.  We will need to watch loan growth figures closely in the next few months.

Let me explain a little further why I worry that easier lending terms won’t cause a surge in borrowing and investing (as they didn’t either in Japan during the 1990s, by the way).  For lending and investment to surge, it isn’t enough that banks make it easier to borrow.  Corporations must also want to borrow.  And when I say “corporations”, I should make it clear that I mean corporations who plan to borrow to invest in new facilities, plant, equipment, distribution systems, etc.  I don’t mean corporations who are holding illiquid assets and who are desperate for liquidity – of which I understand that there are quite a few, especially in the property sector.

But why should these “good” corporations want to borrow and invest?  Obviously enough because they believe that there are profit opportunities that justify their taking the risk of increasing debt servicing costs.  The problem is that if foreign demand for Chinese goods declines with the decline in the world economy, who is going to buy the newly-produced Chinese goods?  With the huge amount of fixed asset investment we have seen in recent years, industrial production in China is very high and growing.  As long as the world was also growing rapidly, China could export its excess production.