China is taking a proactive position by utilizing monetary policy to steer its economy in uncertain climates for growth and trade. The People’s Bank of China (PBOC) Governor Yi Gang is allowing China’s central bank to reduce the percentage of funds banks must keep on reserve with it, in order to free up money for lending.
The cut in reserve requirements is meant to support growth as expansion slows and a trade war heats up. China’s central bank is freeing up more than $100 billion for commercial banks to boost lending and restructure debt. The monetary economics used by the Chinese central bank is similar in nature to that of the U.S. Federal Reserve. The caveat is that unlike the large public money center banks in the U.S., the so-called Big Five banks in China are state-run, and are getting the lion’s share of the monetary easing. The PBOC said the banks are to use the freed-up funds to convert bad loans into equity in companies that default on their debts. The remainder of funds in smaller commercial banks will be used to expand lending to small businesses, the central bank said in the statement. “China is on the way toward monetary easing,” said Zhu Chaoping, a Shanghai-based global market strategist at J.P. Morgan Asset Management.
China’s massive debt burden is back in focus, and threatens the world’s second largest economy. The PBOC’s attempt in the short term to enhance growth through monetary easing will likely be scrutinized by investors. Last March, credit rating agency Moody’s downgraded China, warning that the country’s financial health is suffering from rising debt and slowing economic growth. It’s the first time the agency has cut China’s rating in nearly three decades
The Chinese government is well aware it has a problem. Authorities have introduced a series of measures in recent years to tackle government debt and bad bank loans. They have also tried to reduce the economy’s dependence on credit as a way to fuel growth. Many experts say more needs to be done. Corporate debt in China soared to around 170 percent of GDP in 2016, roughly double the average of other economies, according to the Bank of International Settlements. In 2008, China’s figure stood at about 100 percent. Analysts attribute growing debt to inefficiently run large state owned corporations. There is little incentive to maximize shareholder wealth, as the profits go to the state. As with the U.S. Fed, there is a balancing act between growth and inflation of the yuan in China. Chi Lo, senior China economist at BNP Paribas, said a swift cut in the country’s debt to GDP ratio would be implausible. “This could crush the economy before the benefits of deleveraging could even emerge.”
No doubt the ability by banks to lend and investors to borrow will trickle down to other asset classes. One, in particular, is real estate. At the heart of the communist society, is the necessity to disenfranchise the people by prohibiting ownership of property. As such, the selective loosening contributing to frenzied home buying in many big Chinese cities, is prompting the government to reinstate tight mortgage and other restrictions to curb speculation. The inner-Marxist DNA takes over with the thought of the proletariat rising, and gaining luxuries that only the ruling class is allowed to have. What a wonderful world.