China’s Recovery Is in Real Peril Now
China’s central bank cut its key short-term rate on Tuesday. On top of weak lending data for May, that should be ringing alarm bells.
By Nathaniel Taplin
The People’s Bank of China’s latest rate cut wasn’t exactly a bolt out of the blue. PHOTO: CFOTO/ZUMA PRESSThe People’s Bank of China has capitulated to reality and cut short-term lending rates.
More cuts to longer term rates are likely in the coming days.
But highly leveraged households and companies will continue to weigh on the nation’s post-covid recovery.
PBOC data, also released Tuesday, showed lending slowed sharply in May: growth in economy-wide credit outstanding dipped to 9.8% year over year, from 10.3% in April.
That reverses nearly all of the pickup since December, when China’s economy began shedding its self-imposed “zero-Covid” restraints.
Tuesday’s rate cut itself—the central bank will now offer seven-day money market funding at 1.9% rather than 2.0%—wasn’t exactly a bolt out of the blue.
China’s April macro data was much worse than expected, and this probably means May data, out Thursday, will disappoint too.
There have also been signs in recent days that the PBOC was laying the groundwork for broad rate cuts.
Last week, several of China’s largest banks nudged down some of their deposit rates in concert—something that usually only happens with input from the central bank.
Short-term money market rates have already fallen since the end of May, possibly anticipating central bank action. Tuesday’s PBOC move only brings its benchmark rate in line with where the money market already sits.
That doesn’t mean the rate cut is unimportant though.
Chinese banks have suffered in recent quarters from narrowing net interest margins, which make it difficult to boost lending—and growth—without putting profits and balance sheets at risk.
If the PBOC now guides its key medium-term lending facility rate lower this week, then the cost of three major funding channels for banks—deposits, the money market and central bank lending facilities—will all have moved meaningfully lower.
That will lay the groundwork for actual cuts to borrowing costs for households and businesses.
The problem is that many households, already heavily indebted and viewing a shaky labor market, don’t seem all that inclined to borrow.
By 2021, Chinese urban households already had a higher debt load as a percent of their disposable income than U.S. households, according to data from Clocktower Group, a California-based asset manager.
Mortgage debt in China has risen rapidly in recent years, in part because Beijing has relied on household borrowing to revive the housing market during previous stimulus episodes.
And China’s corporate sector is showing similar signs of squeamishness.
While overall bank lending has accelerated in 2023, year over year growth in the stock of corporate bonds outstanding has continually drifted lower.
In May, corporate bond debt fell outright by 250 billion yuan, equivalent to $35 billion—a sign companies may be using new borrowing to pay off older, more expensive debt, rather than expand their operations.
What this probably means is that more direct fiscal support from the central government will also be needed, one way or another.
China’s economy came strong out the gate in the first quarter but it is increasingly clear that repairing the housing sector and the labor market could be a long slog—unless Beijing is willing to act much more decisively, and take on significantly heavier direct debts itself.
0 comments:
Publicar un comentario