SHANGHAI (Archyde.com) – The People’s Bank of China’s (PBOC) unexpectedly cut interest rates on Wednesday underscored the government’s dilemma. It is a composition that the authorities are trying to revive the economy by supplying abundant funds to the financial system, but consumer demand is still not picking up.
On Thursday, the interest rates for the one-year medium-term lending facility (MLF) and the seven-day reverse repo were cut by 10 basis points (bp) each. But interest rates in the interbank market are already at much lower levels, so the expansion of lending is unlikely to have much of an effect.
Market players say more fundamental measures are needed to restore confidence in the Chinese economy, which has been shaken by the property crisis and coronavirus lockdowns. .
The PBOC faces a “partial liquidity trap,” said Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis. While interest rates haven’t fallen enough to be defined as a Japanese-style liquidity trap, she explained, “cash remains stuck in the big banks” as systemic risk rises.
García Herrero said more “heterodox policies” were called for, even if it would cause moral hazard, with targeted liquidity for small banks lending to SMEs. He said there might be ways to boost growth through measures such as injections.
Other market players say that various measures beyond monetary easing, such as easing coronavirus-related restrictions and direct government bailouts for companies on the brink of bankruptcy, are essential to get the economy back on its feet. is also asked.
The problem, said Rocky Huang, an economist at Guolian Securities, is that the slump in the real estate market has undermined people’s confidence in the future, and amid the debt crisis, aggressive home purchases have stalled and loans for unfinished properties have declined. It is the occurrence of phenomena such as refusal of payment.
“Fixing the real estate problem is essential to revive the economy, but it is a thorny road. I don’t see a solution,” he said.
While the trend in global monetary policy is to raise interest rates to curb inflation, China has pushed once morest this by promoting monetary easing and repeatedly urging banks to expand lending. Still, new yuan-denominated loans plummeted in July and overall credit growth has slowed, showing just how weak demand is.
Meanwhile, China’s banking system is flooded with cash. The country’s broadest monetary supply, M2 (cash plus deposits), rose 12% year-on-year in July, the highest rate in six years. $520 billion) also increased.
“Deposits are pouring into Chinese banks at an alarming pace as both businesses and households become overly safe,” said analysts at Jefferies. The Fed’s rate cut on Friday is a response to a lack of demand, but added that it is unlikely to have a positive effect on the real economy.
David Chao, Asia-Pacific ex-Japan global market strategist at Invesco, said a rate cut would be a good starting point, but an addition that might lead to a bottoming in the real estate market in particular and boost household and business sentiment. He also ordered that a policy like this is indispensable.
Zhao’s specific proposals include lowering mortgage interest rates, easing down payment regulations, streamlining administrative procedures, and easing borrowing restrictions on developers.
Kaiwen Wang, a China strategist at Clocktower Group, said the PBOC, worried regarding financial bubbles, might tolerate a much lower interest rate environment as interbank short-term rates are near record lows. I don’t know if I think regarding it, I showed my view.
Since the interbank interest rate had been well below the policy interest rate since before the rate cut on the 15th, the PBOC’s move was seen as unnecessary.
China’s money market fund (MMF) assets soared to a record 11 trillion yuan in May, surpassing Europe to become the second largest market following the United States, according to Fitch.
Some investors are chasing higher yields, and there are signs that some financial markets are flossing.
According to the latest official statistics, trading volume in the domestic money market in June increased 44% year-on-year, and the average daily trading volume of exchange-traded funds (ETFs) more than doubled from the previous year. You can see a glimpse of the expansion of transactions that make use of
On the stock market, the balance of loans for margin trading rose to a four-month high of 1.64 trillion yuan, while the CSI 1000 index of small stockholders prone to speculative trading rose more than 40% from its April low. and is at a five-month high.
Xia Chun, chief economist at asset manager Yinke Investment, said following the rate cut that China’s 10-year treasury bond futures price hit a two-year high. just,” he pointed out. “The problem is not the lack of liquidity, but the pessimistic outlook and waning confidence of households and businesses. A classic balance sheet recession,” he stressed.
(Reporters by Samuel Shen and Brenda Goh)
