China Is Getting Bubbles, Not Growth, for New Year’s

The central bank keeps pumping money into the economy, but the cash ends up in all the wrong places

By Nathaniel Taplin




Champagne or no, New Year’s Eve must have been a somber affair for China’s top leadership, with word that manufacturing activity declined in December for the first time since 2016.

The bad news from the official purchasing managers index was confirmed Wednesday by the privately compiled Caixin index, which further showed new orders in December down for the first time in 2½ years. 
It’s a sign that nine months of monetary easing by the central bank has failed to boost lending to the real economy, though it has succeeded in pushing housing and government-bond prices into bubbly territory. This kink in China’s monetary-policy machinery bodes ill for 2019, and makes predictions that growth could bottom out in the first quarter look optimistic.

Where banks are lending again, it’s mostly to other financial institutions and the government, not the cash-starved private companies that really drive growth. Since the central bank began early last year to cut the amount of cash banks must hold in reserve—its main stimulus tool of late—interbank lending has roared back. Trading volumes for one-day interbank bond repurchase agreements in November were nearly double April levels.


Money is also flowing into Chinese sovereign and local-government bonds, driving yields down 0.4 percentage point since April. And housing prices have rocketed, with those in smaller cities up more 10% from a year earlier in November, the fastest rate since at least 2010.


China’s first sunrise of 2019—but things could keep getting darker for a while.
China’s first sunrise of 2019—but things could keep getting darker for a while. Photo: Wang Haibin/Zuma Press 


But growth in outstanding bank credit to nonfinancial borrowers has barely budged—and actually dipped again marginally in October—while yields on low-rated bonds, often the only kind smaller private companies can issue, remain sky-high. Six-month commercial paper rated AA-minus is yielding just under 6%, same as in mid-April.

Lower-cost finance for local governments is all very well; large and expanding bubbles in the housing market and high-rated corporate and government bonds, less so. The situation is so bad that the People’s Bank of China was actually forced to drain liquidity from the banking system for much of the past two months, skipping its usual daily interbank cash injections from late October to mid-December, the longest hiatus since at least 2016.

This didn’t offset all the cash injected by the PBOC’s reserve-ratio cuts and its special lending facilities in 2018. That banks were so flush in October and November and still not really lending to the companies that need it shows just how dire the problems have become. In the latest acknowledgment, the PBOC on Dec. 20 unveiled a new lending facility for banks that direct loans to small enterprises.
China’s economy is in trouble. Unless policy makers permit a meaningful rebound in the shadow-banking sector—formerly a key source of credit for private companies—or take the more difficult steps to improve private-sector access to bank credit, things could keep getting darker for a while.

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