Mizuho on the People's Bank of China - saying that the Bank has its policy hands tied.

Despite the twin bogeys of deflation and the absence of significant demand both weighing on growth there is little the PBoC can do.

Mizuho nominate two main limitations on the Bank:

1. All manner of credit constraint

  • In particular, risks associated with a sharp, post-Lehman build-up of leverage compounded by misallocation
  • This not only dampens credit intensity, which diminishes policy efficacy and, in turn, dims the benefit-cost ratio of easing, but also accentuates financial (in)stability threats.
  • Compelling incentives/imperative to avert a "Minsky moment" (credit-asset implosion) that could set off a prolonged "balance sheet recession", underpin one dimension of PBoC restraint.

2. The yuan

  • Excessive policy easing has an adverse impact on CNY, exacerbated by confidence deficit that amplifies capital outflows from rate differentials.
  • And perversely, destabilizing CNY dynamics could tip a slow burn economic slowdown into financial meltdown that triggers a crash. CNY stability is necessarily a competing, and arguably more urgent/important, objective that supplants policy easing.
  • The overarching paradox is less that the PBoC must exercise restraint despite economic headwinds and more that well-intended easing could backfire horribly.
People's Bank of China Governor Pan Gongsheng

People's Bank of China Governor Pan Gongsheng