Why the People's Bank of China can't ease the economic headwinds away

<p>Mizuho on the People's Bank of China – saying that the Bank has its policy hands tied. </p><p>Despite the twin bogeys of deflation and the absence of significant demand both weighing on growth there is little the PBoC can do. </p><p>Mizuho nominate two main limitations on the Bank:</p><p>1. All manner of credit constraint</p><ul><li>In particular, risks associated with a sharp, post-Lehman build-up
of leverage compounded by misallocation</li><li>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.</li><li>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.</li></ul><p>2. The yuan</p><ul><li>Excessive policy easing has an adverse impact on CNY, exacerbated
by confidence deficit that amplifies capital outflows from rate differentials.</li><li>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.</li><li>The overarching paradox is less that the PBoC must exercise restraint despite economic
headwinds and more that well-intended easing could backfire horribly.</li></ul><p>People's Bank of China Governor Pan Gongsheng</p>

This article was written by Eamonn Sheridan at www.forexlive.com.