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Finance & Economy

This is how China is trying to save its economy


Can China save its economy?

Can China save its economy?

China has had 35 years of hypergrowth, but now it’s over. It’s going to have to settle for really, really good growth instead.

But that’s still going to be hard now that fewer Chinese are working-age, fewer people are moving to the cities and, most of all, now that China has a debt bubble it’s trying to deflate without bursting its economy as a whole.

That’s left the country’s central bank, the People’s Bank of China (PBOC), in the awkward position of trying to help the parts of the economy that need help without helping the rest too much.

Specifically, the PBOC will let banks loan out more of their money and give them cheap loans in return for local government debt. This sure looks like China is stepping on the monetary gas to try to keep economic growth, which has already slowed to a six-year low of 7 percent (if that), from slowing any further. But it’s a little more complicated than that.

As if monetary policy with Chinese characteristics wasn’t already confusing enough.

Now, monetary policy is usually pretty simple, but boring. The central bank raises rates when it wants to cool the economy off and cuts rates when it wants to heat the economy up. But there are a couple more steps in China due to its dollar peg.

Think about it like this: China not only wants to keep its currency, the renminbi, worth the same amount of dollars — albeit, with a little wiggle room — it also wants to keep the renminbi worth the same amount of dollars after inflation. That’s how you subsidise your exports. This last part is tricky, though, because there were so many dollars coming into China, from trade and investment, that the PBOC had to print a lot of renminbi to keep its value from going up.

And that’s a problem, since all that new money would have meant more inflation if it got out into the economy. So, to stop it from doing so, the PBOC told banks that they couldn’t lend as much money out — by raising their reserve requirement ratio (RRR). In other words, China has been printing money to prevent its currency from going up, and then telling banks they have to sit on this new money to prevent inflation from going up.

But China isn’t just trying to keep its currency where it wants. It’s also trying to keep credit where it wants. That’s why, as economist Mark Dow points out, the only way to tell if China is tightening or loosening policy is to look at the total amount of loans being created. Sometimes there’s so much money coming into the country that even if it raises the RRR, it isn’t really making money any tighter since the amount of credit is constant. But now, for the first time in a long time, the opposite is true. Enough money is leaving China that the nation has had to cut the RRR, which it’s done more than expected, just to keep credit from falling.

Now it’s worth thinking about this for a minute. When more money is leaving China than coming in, everything we talked about before goes into reverse. China isn’t printing money to keep the renminbi down, but rather spending its dollars to keep the renminbi up. And that means there isn’t as much money to turn into loans — a passive monetary tightening — unless the PBOC says banks can lend more of what they do have out. The good news, though, is that with the RRR at 18.5 percent, there’s still plenty of room to cut to keep growth from slipping too much.

Those last three words — slipping too much — are the most important. China isn’t cutting rates to try to make the economy grow more than it already is, but instead to try to keep the economy growing as much as it already is. That might just seem like a word game, but it’s not. China realises that its economy is going to inevitably slow down, and it’s not trying to fight that. It’s just trying to keep it from happening all at once.

There’s one last wrinkle. China not only tries to target the total amount of credit but also the kind of credit. That was easy enough when the government could tell state-owned banks to lend and bully private ones into lending to whomever they wanted them to. But it’s not so easy now that those banks have the freedom to say no to deals that don’t look good, such as buying local government debt.

Now the problem is that local governments borrowed so much the last seven years that, because they rely on land sales for revenue, they could only pay back what they owe as long as property prices were rising. They’re not now, though. In fact, housing prices are falling. It’s gotten bad enough that local governments have actually started buying land from themselves to try to prop up prices and keep revenues coming in.

That’s quite literally moving money from your right hand to your left to make it look like you still have money coming in. So it’s not surprising that the central government stepped in and said it would guarantee new local government bonds. But even that wasn’t enough to make banks buy them once they saw how little the bonds would pay.

So the central bank has tried to get them interested by saying it will let banks use local government bonds as collateral for cheap loans that they then have to re-lend to small businesses. The idea is to create demand for debt that nobody wants — but needs to be rolled over — at the same time that they nudge the banks to lend to whom they want them to. In other words, it’s subsidising the banks that buy local government bonds by giving them all-but-guaranteed profits lending to small businesses. It’s not so much monetary easing as monetary targeting.

If it misses the mark, China’s growth miracle isn’t going to be much of one for much longer.

Contributed by Italy China Web

Source: The Washington Post – This is how China is trying to save its economy

 

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About Sky In Company

I am Genevieve Cheung, originally from Hong Kong. After completing secondary studies, I moved to Australia where I completed a degree in Bachelor of Business Management at the VUT in Melbourne. After graduation I moved to Italy where I have been living for more than twenty years. My vast cultural background and extensive linguistic knowledge (speak and write fluent English, Mandarin/Cantonese Chinese and Italian), allow me to join our company- SKY IN COMPANY (HK/ITALY). We provide main services such as web-site translations from Italian/ English to Chinese/English, and SEO services for the Chinese search engine "Baidu". Our offices, based in Hong Kong and Italy, have a young and dynamic team with collaborators around the world. Sono Genevieve Cheung, originaria di Hong Kong; dopo aver completato gli studi secondari, mi sono trasferita in Australia, dove ho conseguito una Laurea in Bachelor of Business Management presso la VUT di Melbourne. Dopo la Laurea mi sono trasferita in Italia, dove vivo ormai da più di venti anni. Il mio background culturale e la vasta conoscenza linguistica (parlo e scrivo correntemente l’inglese, il cinese mandarino e l’italiano), mi consentono di partecipare in quest’attività di traduzione in Italiano/English/Cinese. La principale attività della nostra ditta – SKY IN COMPANY (HK), consiste nella traduzione in lingua cinese di siti web italiani, nonché di servizi di tipo SEO rivolti al motore di ricerca cinese “Baidu”. La nostra ditta principale, con base in Hong Kong, dispone di un team giovane e dinamico con collaboratori in tutto il mondo. WWW.SKYINCOMPANY.COM skyinhk74@yahoo.com.hk HONG KONG OFFICE: Flat b 15/F, Block 7 Yee Mei Court, South Horizon, Ap Lei Chau, Hong Kong Island Hong Kong Tel: ++852 92235260 ITALY OFFICE: Via Metastasio 27 Firenze 50124 Italy Tel: ++39-347 1429011

Discussion

One thought on “This is how China is trying to save its economy

  1. Reblogged this on msamba.

    Like

    Posted by agogo22 | May 14, 2015, 8:29 am

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