It was only last week that we began with an interest-rate cut in China to boost its struggling property market. Thus this morning we got a splash of deja vu or if you prefer groundhog day.
The one-year loan prime rate (LPR) was lowered by 5 basis points to 3.65% at the central bank’s monthly fixing on Monday, while the five-year LPR was slashed by 15 basis points to 4.30%. ( Reuters)
Different interest-rates to last week admittedly but the band is playing the same old song. The five-year rate has been cut by more because it impacts on mortgages.
The one-year LPR was last reduced in January. The five-year tenor, which was last lowered in May, influences the pricing of home mortgages.
Reuters at first note the expected slowing of the economy.
Goldman Sachs lowered China’s 2022 full-year GDP growth forecast to 3.0% from 3.3% previously, far below Beijing’s target of around 5.5%. In a tacit acknowledgement of the challenge in meeting the GDP target, the government omitted a mention of it in a recent high profile policy meeting.
But then get around to what is in my opinion the real issue here.
The deeper cut to the mortgage reference rate underlines efforts by policymakers to stabilize the property sector after a string of defaults among developers and a slump in home sales hammered consumer demand.
What is driving this?
As well as the particularly Chinese feature noted by the Financial Times below there is a factor us Western Capitalist Imperialists have faced quite a few times.
Strategists warned that the rate cut was unlikely to address a crisis of confidence faced by Chinese developers, many of which are struggling to finish incomplete “pre-sold” homes for which down payments have already been received. The method of financing construction has become more common as authorities cracked down on excess leverage in the sector in recent years.
The FT gets a bit warmer here.
“So far, lower mortgage rates haven’t translated into higher property sales due to the lack of confidence in large developers and the presales model,” said David Chao, global market strategist at Invesco. “Policymakers may need to implement more non-traditional measures or even some kind of intervention in order to restore faith in the property market.”
The issue is that once confidence is lost then interest-rate cuts only have a marginal influence. During the boom people will have rushed to borrow more probably up to the maximum if we saw an interest-rate cut. But now they may use a lower payment as a way of deleveraging. So the only government solution may be for direct intervention.
That gives us two types of boom and bust cycle going on. First the ordinary one of human behaviour but also a government one driven by this.
the country’s debt-laden real estate sector, which accounts for almost a third of annual economic output. ( Financial Times)
The government was happy for this to boost recorded economic output via GDP but then got nervous it was too much and started to reduce things. Soon it may be going the other way but will find it much harder now. This has been due to contagion or if you prefer that the rot has already set in.
Last week, Country Garden, the country’s largest real estate group by sales, estimated first-half profits fell as much as 70 per cent, in the latest sign that a financing crisis once limited to high-risk developers such as China Evergrande has spread to the rest of the industry. ( FT)
Inadvertently the Financial Times has highlighted another issue with some rather extraordinary language.
China has slashed its mortgage lending rate for the second time this year as the country’s central bank seeks to limit the fallout from a liquidity crisis in the property sector.
A 0.15% cut is hardly “slashed” and that is before we get to the 0.05% change.
In my opinion a crisis like this will not be solved by this as I am reminded of the words of Newt in the flim Aliens.
It wont make any difference
The Yuan
We can switch to an impact here because one of the things staying the hand of the People’s Bank of China on interest-rates is that they are rising elsewhere and especially in the US.
But worries over widening policy divergence with other major economies dragged the Chinese yuan , to near two-year lows. The onshore yuan last traded at 6.8258 per dollar. ( Reuters)
That is what happened as an initial response and it is 6.84 as I type this for a 0.3% move. Care is needed as this is as much a managed exchange-rate as a free floating one and it has declined by less than 5% versus the US Dollar over the past year. Whereas the “Dolla Holla” phase sees the Yen near 137, the Euro on top of parity and the UK Pound near US $1.18, so we can conclude that the Chinese are trying to keep the Yuan strong.
That idea is reinforced in a couple of ways by this below.
China’s share of global goods exports by value increased over the course of the pandemic, to 15% by the end of 2021 from 13% in 2019, according to data from the United Nations Conference on Trade and Development, which tracks global trade. ( Wall Street Journal)
Firstly such a performance will support the exchange-rate in a basic sense but also there is not a lot of point lowering the economy to boost exports when they are already doing well. It seems to be continuing.
China’s export boom has continued in 2022, defying economists’ expectations for a slowdown.
Actually it makes the Chinese economy even more unbalanced but ley me also note this. We in the west were supposed to be reducing our reliance on China in high-tech areas.
China’s slice of global electronics exports, for instance, increased to 42% in 2021 from 38% in 2019, while its share of textile exports rose to 34% from 32%, UNCTAD data shows.
Comment
There are further echoes of the past in today;s news because if we look back one of the issues pre credit crunch was the Chinese trade surplus. As we have it it is more than the “I’ll be back” line of The Terminator. But whilst in itself it is a boost for the Chinese economy it is not enough in itself if these numbers from South Korea are any guide.
Exports to China fell by -11.2%YoY ( @Trinhonomics )
They are for the first 20 days of August and suggest that Chinese consumption is struggling. That is a recipe for something that is rather Japanese as the “lost decade” causes had such trends as a feature.
If we return to the property market then the weak domestic demand scenario just dds to the troubles and is a case of which comes first, the chicken or the egg? Weak domestic demand does not help the housing market and vice versa. We know what western central banks think via their obsession with house prices.