China responds to its property crisis with an interest-rate cut

by Shaun Richards

This week has already brought news confirming one of our themes.It links to the idea that you should look at what people do rather than what they say.

The People’s Bank of China (PBOC) said it was lowering the rate on 400 billion yuan ($59.33 billion) of one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points (bps) to 2.75%, from 2.85%.

The central bank also injected 2 billion yuan through seven-day reverse repos while cutting the borrowing cost by the same margin of 10 bps to 2.0% from 2.1%, according to an online statement. ( Reuters )

So the talk that the economy was fine has morphed into an interest-rate cut, which with other central banks increasing interest-rates resonates more loudly. Although I still hold the view that a 0.1% change in interest-rates is unlikely to achieve much.

As to a rationale we know that central banks hate weak housing markets and this had just been released.

Compared to a year ago, new home prices in July fell 0.9%, the fastest pace since September 2015, and extending a 0.5% decline in June, according to Reuters calculations based on National Bureau of Statistics (NBS) data released on Monday.

We have been watching the weakness in this area for some time and the bit below about it being a quarter of the economy reinforces the issue.

Already grappling with a debt crisis among developers and weak homebuyer sentiment, China’s property market, accounting for a quarter of gross domestic product by some metrics, has been further rocked by a mortgage boycott that erupted last month across the country. ( Reuters )

Friday had told us this.

Chinese banks extended 679 billion yuan ($101 billion) in new yuan loans in July, less than a quarter of June’s amount and falling short of analysts’ expectations, data released by the People’s Bank of China (PBOC) on Friday showed…….Household loans, including mortgages, fell to 121.7 billion yuan in July from 848.2 billion in June, while corporate loans slid to 287.7 billion yuan from 2.21 trillion.

Although I see that my view that central banks operate to protect their housing markets and banks bypassed those Reuters spoke too.

But few China watchers now expect cuts in benchmark lending rates, which could raise the risk of capital flight as other major central banks sharply raise rates to battle surging inflation.

Property Problems

We have seen problems appear in many areas symbolised by the problems with rural banks and the mortgage boycott. The real issue here is a system under strain as Michael Pettis explains below.

Second, many analysts have proposed various ways of resolving the problems facing China’s rural banks and the owners of unfinished apartment buildings or the Chinese real estate market, more generally.

The issue is that just like us western capitalist imperialists the solutions are to kick the can, or if you prefer some version of “extend and pretend”

Yet most of these supposed resolutions do not resolve anything. These proposals consist mainly of ways of postponing a painful or chaotic resolution by restructuring and extending implicit and explicit liabilities. Most of these extensions involve directly or indirectly placing repayment obligations on local governments or larger, solvent banks.

We have reached the point that debt is now the problem rather than the solution. If it ever was the latter…..

In China, however, many years of rapid debt expansion have been backed by nonproductive investment in infrastructure and property and by a systematic overvaluation of real estate property. The rise in debt, in other words, has not been matched by a rise in the economy’s overall debt-servicing capacity.

This is an issue that has elements of something that has become a generic.Central banks love to pump up a housing market as the can claim “Wealth Effects” from the higher asset prices which also boost the position of the mortgage books of the banks. The problem for China is that the scale of all of this means it has gone beyond the ability of the property market to finance it.

Part of this was driven by what is the equivalent a type of fearing for developers. This is for developments not yet finished and the emphasis is mine..

the practice in China is special in two ways. First, homebuyers have to pay in full when they decide to buy. Usually, they produce a downpayment for a mortgage and the bank covers the rest. But in other countries like the UK, buyers of presale homes only need to come up with a deposit to reserve a property. ( Caixin )

So the developers get the money early and in a bull market it is fine for them to put it into the next development.

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Second, until recently, Chinese developers had been allowed to use the bulk of their presale revenue for whatever they wanted.

Actually at times it was worse than that.

Instead, a vast amount of presale funds ended up in developers’ own accounts. ( Caixin)

Buyers were not that bothered when prices were going up but now they are not rising they want their homes which has led to the mortgage boycotts.

Power Problems

This is an issue we have seen before and I note this from earlier today. This is from Sichuan.

All industrial power users in the electricity plan (including white-listed key protection enterprises) will stop production (except for security loads), take high temperature holidays, and let electricity be used by the people, from 00:00 on August 15, 2022 to 24:00 on August 20, 2022 00.  ( STCN)

One factor here is that China’s largest hydroelectric plant is being affected by low water levels on the Yangtze river.

Even though there has been quite an expansion of coal it does not appear to have been enough.

SINGAPORE (Reuters) -China’s daily coal output in July surged 16% from a year earlier following Beijing’s call for miners to ensure sufficient supply during the peak summer demand season.


There is a fair bit here that is familiar with an addition of what level-42 called.

The Chinese way
Who knows what they know

But we know from housing boom and busts that these does feed into the real economy. One direct route is retail sales. From China Statistics

In July , the total retail sales of consumer goods was 3,587 billion yuan, a year-on-year increase of 2.7% . Among them, the retail sales of consumer goods excluding automobiles was 3,204.6 billion yuan, an increase of 1.9% 

For the year so far they are down.

From January to July , the retail sales of consumer goods in urban areas was 21,391 billion yuan, down 0.3% year-on-year ; the retail sales of consumer goods in rural areas was 3,239.1 billion yuan, up 0.1% .

This reinforces what we looked at last week where a lack of domestic demand meant that inflationary pressure was lower than elsewhere. China is producing more but for who?

From January to July , the added value of industrial enterprises above designated size increased by 3.5% year-on-year .

It all seems so predictable although I note the financial media telling us it is a “shock” and “unexpected”

Lastly the exchange-rate did weaken a little but only to 6.77 versus the US Dollar reminding us that the PBOC keeps a tight grip on it.


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