Courtesy of Also Sprach Analyst.
Despite widespread calls for it to do so, the People’s Bank of China (PBOC) has not yet cut the reserve ratio requirement (RRR) for banks, let alone interest rates more generally.
This is mainly because, in my view, the real estate market has been warming up much quicker than the government would like. Home buyers appear to be queuing up to buy after prices fell as they fear that prices will rebound strongly, particularly after the rate cuts.
Thus the government is not going to relax its grip on the real estate market. On the contrary, the government may tighten again after local governments fine-tuned (translation: eased) the real estate policies since late last year and early this year.
After the State Council’s inspection of the implementation of the real estate market curbs, and after the real estate market showed signs of life (despite speculators in Wenzhou screaming HELP), there is a growing consensus that another round of property market curbs is coming. One of the possibilities is a property tax, as Economic Information suggests that the property tax will be expanded beyond Shanghai and Chongqing. Tax specialists from 30+ provincial and local governments in China are now attending a 4-month training course to develop a property tax scheme, possibly for roll out at a national level.
On top of that, there is a growing consensus that inflation could have bottomed in the short-term following the rise of global agricultural commodities prices. Although I still believe that the impact on headline inflation will be very modest, I suspect that the perceived room for further easing will be narrowed if inflation ticks higher in the coming months.
As a result, I am much less optimistic regarding the prospect of aggressive easing than in 2008/9, at least for the time being.
Indeed, one economist for the state’s economic planner thinks that the situation is not bad enough for any more easing, while a former PBOC advisor thinks that the bank has already gone too far, according to the Wall Street Journal:
“China’s current economic situation is not that bad,” said Zhu Baoliang, chief economist at the State Information Center under the National Development and Reform Commission, China’s top economic planner. There is no need for the central bank to take “overly intensive” moves, especially with a possible rebound in inflation from August, he said.
In fact, said, Zhou Qiren, an academic economist and former adviser to the PBOC, monetary loosening may already have gone too far.
“The market needs time to adjust, and structural reforms take time,” he said at a forum Saturday. “The economy should be allowed to slide, or else a lot of problems won’t be eradicated.”
The policy dilemma is going to make policymakers hesitant to stimulate the economy more aggressively, and that does not bode well for economic growth in the short-term.
On the fiscal side, however, there has been some further shift towards stimulus. Some small and medium-sized Chinese banks have increased lending to local government financing vehicles (LGFVs) according to Wall Street Journal (Chinese), citing Yicai.
Some 20 banks, including a lot of small and medium sized banks, have already extended credit to local governments. Borrowers included the government vehicles of Tianjin, Lanzhou, Gansu province, Zhangjiang and Guandong. The sizes of these credit lines range from several billions to tens of billion Chinese Yuan.
Most funding from these loans are said to be used in affordable housing development, basic infrastructure and others, according to Yicai.
As local governments have announced investment projects to stabilise growth already totalling more than RMB4 trillion, the question regarding the funding has been raised repeatedly by observers. However, I believe that as long as the central government is comfortable with having some sort of a repeat of the 2009 stimulus (which, as a reminder, is now widely regarded as a mistake), there should be no problem with funding because banks will be instructed to lend.
This is better news as far as GDP growth is concerned, although I remain sceptical that bank lending to LGFVs will surge dramatically, especially as the central government is expected to maintain a firm grip on the real estate market.