Slower growth may be the new normal but a collapsing economy is not. With homes sales slumping and industrial output at its weakest levels in more than five years, Beijing has been quietly boosting banking liquidity and lowering interest rates for home buyers. Far too quietly, in our view.
What the economy needs is a shot of confidence – not the random buckets of liquidity that the administrative authorities have been dumping onto various sectors over the past months. Not only have the tinkering measures been ineffective, they are sending the rather alarming message that the government is either unaware of realities on the ground, or has run out of solutions, or both.
But instead of making reassuring noises, Beijing keeps hammering home its no-easy-money stance. Finance Minister Lou Jiwei said on Monday there will not be major policy adjustments in response to any one economic indicator – echoing a similar statement by Prime Minister Li Keqiang at the recent Davos summit.
Yet the government partially lowered mortgage rates this week and essentially freed up billions of dollars in the banking system last week. This came with some policy contortions – as if in fear the moves might be interpreted in the wrong quarters (such as spendthrift local governments) that it is going down the path of easy money.
Interest rate cuts in the mortgage market were disguised as an administrative re-classification. And the equivalent of a reduction in banks’ reserve requirements was packaged as a low-interest loan from the central bank.
On Tuesday, the major banks let it be known that home owners who have repaid their mortgage in full can now join the ranks of first-time buyers with discounts of up to 30% of the central bank's long-term lending rate. With the benchmark currently at 6.55%, this implies a mortgage rate for preferred buyers of 4.59% compared with the weighted-average lending rate of 6.96%.
Reflecting that approach, the People’s Bank of China last Wednesday made $81 billion available to big banks to counter slower-than-expected loans growth. The injection will have a similar impact to a 0.5 percentage point cut in the reserves requirement. And it will be in the form of a three-month, low-interest-rate loan to the banks.
Backdoor easing
Backdoor monetary easing began in July. Regulators relaxed rules on how the loan-to-deposit ratio of banks is calculated – which effectively freed up more funds for bank lending without having to lower the reserves requirement. The new rules narrowed the scope of loans and widened the scope of deposits applicable to the ratio.
But liquidity boils down to confidence.
Beijing can lower borrowing costs all it wants, but if home buyers have no faith in the market’s outlook, they will not be taking out mortgages. And it can free up as much funds as it likes in the banking system, but the money will still be sloshing around unproductively if lenders are not comfortable writing loans.
Beijing’s tinkering approach is understandable. Such has been the pain of picking up the pieces from the 2008 spending spree that the government is reluctant to make any moves that could be interpreted by as turning on the taps leading to a repeat of local authorities’ 2008 free-for-all spending spree.
But targeted easing has not delivered the hoped-for rebound in growth.
Total social financing, which is China’s broadest measure of new credit that includes bank loans and bonds as well as shadow banking products, contracted by 6.3% in the first eight months of this year.
Housing slump
The all-important property sector shows no signs of rebound. Home prices fell for the fourth straight month in August. Construction starts are down (dropped by 10.5% in January to August). Sales of new homes declined (a 10.9% drop in value terms, in January to August). And real-estate investment growth slowed (13.2% in January to August, compared with 13.7% January to July and 13.5% in 2013).
This sector is crucial to the economy. Property accounts for 15% to 25% of final demand in the economy, depending on which related industries are included. Land sales provide half of local government revenues, much of which go towards meeting debt obligations.
More worrying is that land is frequently used as collateral for bank loans. With an estimated 100 billion yuan ($16.1bn) in local government debt coming due this year, regulators have publicly expressed concern over developers' ability to meet debt obligations and the impact this may have on the banking system.
The government’s own economists have broken ranks over the official position of “targeting easing”, with supporters of outright interest rate cuts and reductions in reserve requirements taking their arguments to the pages of the Party mouthpiece, The People’s Daily.
We’ve been saying since July that Beijing may soon be forced to abandon its tinkering approach and go Big Bang to jumpstart growth. Despite the official denials, the question is no longer if this might happen but when – and what label it will give to the stimulus measures to avoid the impression that it has backtracked on its public stance.