Stock market crash will blunt monetary policy in China

Subject

Monetary policy and the stock market in China.

Significance

The People's Bank of China (PBoC) has cut interest rates and required reserve ratios five times this year -- the fastest pace of monetary policy adjustment since the 2008-09 financial crisis. However, the effectiveness of the intervention is diminishing each time, leading to pessimistic expectations of both the stock market and the macroeconomic outlook.

Impacts

• A slowdown in the real economy will hinder recovery of investor confidence and stock prices in the medium term.
• Higher financial costs due to the 'liquidity trap' will decelerate policy-driven economic growth in the long run.
• Some foreign capital will flow out of China, putting a degree of downward pressure on the renminbi.