Place strategy

The stimulus remains in place even when the outlook darkens

SHANGHAI: China’s property market crisis is testing whether central bank governor Yi Gang can stick to his soft stimulus strategy.

Over the past two weeks, Yi has cut key rates, announced special loans to struggling property developers through strategic banks and urged public lenders to extend more credit.

In the meantime, speculation on a reduction in reserve requirement ratios is increasing.

Even with the series of recent moves, the focus is still on risk control.

This is in line with the cautious political mindset of Premier Li Keqiang and the State Council, which stipulates that the country will “not outrun the future”.

It’s a “fine line that the People’s Bank of China (PBoC) has to walk,” says Hui Feng, co-author of The Rise of the People’s Bank of China and senior lecturer at Griffith University.

“Although growth has been lackluster, the central bank is concerned that monetary stimulus could lead to higher leverage in the economy, with a higher cost than benefit.”

consumer confidence

Economic challenges are piling up as China prepares for the 20th Party Congress, where President Xi Jinping is expected to be endorsed for an unprecedented third term.

The housing market is in crisis, Covid zero restrictions are undermining consumer confidence and the annual growth target will be largely missed for the first time since they began to be set in the early 1990s.

“Monetary easing alone may not be enough to revive demand, which has been shattered by the housing crisis and zero-Covid restrictions. Restoring business and consumer confidence will likely require a bigger policy shift,” said economist Eric Zhu.

Yi recently promised that monetary policy would remain “accommodative” to support the economy, there is an implicit limit to how far the PBoC will go.

In the past, he has opposed quantitative easing and avoided steep interest rate cuts, preferring more targeted tools.

The PBoC said in a statement Monday, following a meeting chaired by Yi, that financial institutions, especially large state-owned banks, should increase the issuance of loans to the real economy.

It has also stepped up the provision of targeted liquidity to support priorities such as technological innovation and the elderly care sector. The so-called structural tools now total 5.4 trillion yuan (RM3.5 trillion), up from about three trillion yuan (RM1.96 trillion) five years ago.

The fastest inflation in more than four decades seen in the United States and other Western economies – in contrast to subdued domestic prices – partly justifies Yi’s targeted approach.

The PBoC said in this month’s latest monetary policy report that China has “insisted on not overstimulating or printing excessive amounts of money, and this has laid a solid foundation for maintaining stable prices – a hard-earned achievement”.

Downward spiral

But right now, the PBoC’s cautious approach appears to be hitting a wall as demand in the economy is so significantly weakened by restrictions aimed at stopping Covid infections and the downward spiral in the real estate sector.

Companies are reluctant to increase investment due to Covid-induced uncertainties and after a regulatory storm that has upended industries including tutoring and internet platforms.

Defaults by property developers and a rise in stalled housing projects continue to plague the industry that once handled almost 40% of all loans.

Stronger borrowing

The result is that cheaper money and an abundant supply of credit have not led to more debt, increasing the risk of a “liquidity trap”, where lower interest rates are not able to stimulate credit demand and growth.

Yi’s monetary caution joins President Xi’s assertion that China has entered a “new stage of development”, where priorities such as national security, reducing income inequality and maintaining social stability eclipse unhindered economic growth.

Economic development must be greener, more balanced and propelled by technological innovation and structural reforms that result in increased productivity and efficiency, Xi said, instead of being driven by unsustainable and dangerous debt crises fueled by cheap money.

Given Xi’s new imperatives, the PBoC is unlikely to embark on an outsized stimulus as it did in the wake of the 2008 global financial crisis or when a surprise yuan devaluation rattled confidence. in mid-2015.

Such measures would jeopardize the progress made over the past five years in defusing a debt bomb that has permeated sectors such as the real estate industry, local government finance, the shadow banking sector, consumer credit consumer and large conglomerates.

Indeed, even if Yi wanted to, he could not take major easing measures unless Xi agreed.

Unlike its global counterparts which enjoy a high degree of independence from their governments, the PBoC must obtain State Council approval before making major decisions on money supply and interest rate.

Like almost every branch of government in China, there is also a Communist Party oversight layer, with Guo Shuqing, head of the banking and insurance regulator, party leader of the PBoC. Yi, the deputy party leader, is responsible for day-to-day operations.

Although less independent than its global peers, Yi wields more power in other ways as many parts of the economy are still not yet free from state control, even after four decades of market reforms.

This includes the vast US$56 trillion (RM251 trillion) banking sector, which is made up mostly of state-run lenders and regional banks with close ties to local governments.

Capital flows

The PBoC wields great power over the pace and direction of bank lending, as well as cross-border capital flows, through a so-called macroprudential rating system introduced over the past decade.

The system aims to maintain financial stability and contain debt accumulation and “pro-cyclical risks”. —Bloomberg