China stimulus - Is this pushing on a string?

 

China (PBoC) cut its benchmark interest rate and reduced reserve requirements for bank to support the targeted growth rate of 5 percent. The 7-day Repo rate was moved from 1.7 to 1.5% with reserve requirements dropped .5% and a signal that there would be further cuts later this year. This adds about 1trillion in RMB liquidity. It was also announced that 500 billion RMB will be used to help brokers, insurance companies and funds to buy stocks and the PBoC will use 300 billion RMB to help firms conduct stock buybacks. The PBoC lowered mortgage downpayment for second homes from 25 to 15% and it would improve terms for its 300 billion RMB programs to help local government-owned enterprises to buy unsold inventory from property developers. 

This is a robust stimulus program which has provided a strong market bounce. Equities are up nearly 10% for the week. This is the best since 2008, but there are structural problems that still have not been addressed. Consumer confidence and a change in the direction of policy to consumer spending from exports and investment has not occurred. Allowing for private companies to better compete is not really on the table. 

There is not a good economic story for China at this time. Leverage is too high. Debt is too high. The real estate problem still exists with property prices still falling. Growth is slow, and there is not a good business environment. Investors have been pulling money out of the country.