Don't say stimulus

WITH the Chinese government still trying to slow credit growth after releasing a flood of lending from state-owned banks in 2009, stimulus is a toxic word in Beijing. From the prime minister on down, the official line has consistently been that China neither needs nor wants another stimulus, and that the focus is instead on reforms to put the slowing economy on a stable footing for the long run.

So it was notable last month when Chen Dongqi, vice-head of a governmental research institute, chose the term "mini stimulus" to describe the array of adrenalin shots that the state has started administering to the economy. The fear is that the cooling property market, in particular, will pull growth below the official goal of "about 7.5%". Independent commentators have previously referred to a "mini stimulus", but Mr Chen was hailed as the first person speaking in an official capacity to define the policy stance as such. It appears to have been a slip-up. The cabinet, the central bank and top policymakers have still managed to keep the dreaded phrase from crossing their lips.

But who can blame Mr Chen? Virtually every week since early April, the government has introducedoften publicly, sometimes notnew measures to encourage investment and prop up growth. The first came in early April when the cabinet announced a small batch of fiscal initiatives, including investment in railways, spending on public housing and tax breaks for small businesses. By themselves, these would not have been enough to arrest the economy's slowdown, especially as the property market, a critical growth engine, has sputtered.

But the government has steadily added to its initial package. It has pledged to invest yet more in railways and is now aiming for 800 billion yuan ($128 billion) this year, a fifth more than last year. It has launched big water-management projects. And it has taken the unusual step of urging local governments to speed up implementation of their spending commitments.

Most potently, the central bank has also been drafted into the effort. After resisting calls for nearly a year to ease monetary policy, the People's Bank of China has quietly taken several stimulative steps. It began by injecting cash in financial markets through its weekly auctions, reducing banks' short-term funding costs by about a percentage point from the average in the second half of last year. Then the central bank dusted off its relending scheme, originally used to bail out struggling banks a decade ago, whereby it provides cheap funds to be lent on to specific categories of borrower. This time, the money is to be used to tart up poor neighbourhoods, with as much as 300 billion yuan being channelled through the China Development Bank (CDB). CDB will be expected to repay the loan eventually, but in the meantime the relending allows the central bank to expand the monetary base. For that reason, some investors call it "Chinese-style quantitative easing".

The big question hanging over the central bank is whether it will give a more dramatic loosening signal by cutting either interest rates or reserve requirements, which would free up extra cash for banks to lend. A partial answer came on May 30th, when the cabinet said it would lower reserve requirements for banks that devote a sufficient share of their loans to small businesses and agriculturea prerequisite that most big banks are likely to satisfy.

All this is still a far cry from the 4 trillion yuan stimulus the government launched in 2008, which led to an even bigger leap in lending. It is also important to note that the looser constraints on banks are partly intended to balance the effects of a clampdown on off-balance-sheet credit flows. But the pattern of the past two months suggests that the government will be firing off new expansionary measures as long as its growth target is in jeopardy.

[Q]The article mentions that "the central bank has also been drafted into the effort." Which tools of monetary policy did the People's Bank of China (PBC) use to stimulate the economy?