Chinese stimulus is NOT coming to the rescue

Via Reuters:

The People’s Bank of China (PBOC) said it will improve the mechanism used to establish the loan prime rate (LPR) from this month, in a move to further lower real interest rates for companies as part of broader market reforms.

Analysts say the move, which came after data that showed weaker than expected growth in July and followed a cabinet announcement on Friday, underscores the government’s attempts to use reforms to support a slowing economy.

“By reforming and improving the formation mechanism of LPR, we will be able to use market-based reform methods to help lower real lending rates,” the PBOC said in a statement published on its website.

Every effort to lower borrowing costs has failed. Every effort to steer capital away from zombie industries and real estate speculation has failed. I agree with RaboBank completely:

  • we have had endless “reforms” in recent years that are nothing more than a veneer: this looks an easily-gameable version of the same.
  • Does anyone believe Chinese banks are not already lending at incredibly-favourable rates to key SOEs? Does anyone believe banks are going to lend to SMEs on more generous terms on a purely market/risk basis? That doesn’t even happen in the West, so why should it in China?
  • Most importantly, if there is any real signal from this move it is that for new loans at least, monetary policy is being eased, meaning further gradual stimulus. That’s not really a surprise

The problem remains, via iFeng:

Financing Difficulties? Interest rate “two tracks and one track” needs to be promoted

The relevant person in charge of the central bank pointed out that at present, the upper and lower limits of China’s loan interest rates have been liberalized, but the deposit and loan benchmark interest rates are still retained, and there is a problem of “interest rate double track” where the loan benchmark interest rate and market interest rate coexist. When banks issue loans, most of them still refer to the benchmark interest rate of the loan. In particular, individual banks set a hidden lower limit by a certain multiple of the benchmark interest rate (such as 0.9 times) through coordinated actions, which hinders the transmission of market interest rates to the real economy. An important reason for the obvious downward trend in interest rates but the lack of experience in the real economy is the core issue that needs to be urgently resolved in the current market-based interest rate reform.

“The main measures for this reform are to improve the formation mechanism of the loan market interest rate (LPR), improve the marketization degree of LPR, play a good guiding role of LPR on the loan interest rate, promote the loan interest rate ‘two tracks and one track’, and improve interest rate transmission. Efficiency, and promote the reduction of financing costs in the real economy,” said the person in charge.

Dong Xiwei, vice president of Chongyang Financial Research Institute of Renmin University of China, told the China-China Jingwei client that due to the existence of interest rate “two tracks”, on the one hand, policy interest rates are difficult to be effectively transmitted among financial sub-markets such as currency, bonds and credit, affecting interest rate transmission. The effect is not conducive to the realization of monetary policy objectives; on the other hand, the pricing of financial products is difficult to accurately reflect the market interest rate in a timely manner, which is not conducive to the flow of funds from financial institutions to the real economy, affecting the efficiency of financial resource allocation. Therefore, we must actively and steadily push forward the interest rate “two tracks and one track” work.

Take more measures to reduce the actual interest rate of loans

The National Convention meeting held on the 16th pointed out that since the beginning of this year, all parties concerned have made active efforts, and the overall financing interest rate of the whole society has generally stabilized and declined. We must continue to maintain this situation, especially in the face of the current situation. We must maintain a reasonable and sufficient liquidity, adhere to the reform measures, promote a significant decline in the real interest rate, and work hard to solve the problem of “funding difficulties”.

The relevant person in charge of the central bank said that by reforming and improving the LPR formation mechanism, it is possible to use the market-oriented reform measures to promote the effect of lowering the actual interest rate of loans.

The person in charge said that first, the overall market interest rate in the previous period will be larger, and the LPR formation mechanism will be more reflective of the decline in market interest rates. Second, the new LPR is more market-oriented, and it is difficult for banks to coordinate the implicit lower limit of the loan interest rate. Breaking the implicit lower limit can cause the loan interest rate to decline. The regulatory authorities and the market interest rate pricing self-regulatory mechanism will supervise the banks, and the enterprise can report the bank’s behavior of setting the implicit lower limit of the loan interest rate. The third is to explicitly require banks to refer to LPR pricing in newly issued loans, and use LPR as a pricing benchmark in floating-rate loan contracts. In order to ensure a smooth transition, the stock loan is still executed as originally agreed. Fourth, the People’s Bank of China will incorporate the bank’s LPR application and loan interest rate competition into a macro-prudential assessment (MPA) to urge banks to use LPR pricing.

For more measures to reduce corporate financing costs and loan interest rates, the relevant person in charge of the central bank said that the central bank will also take various measures with relevant departments to effectively reduce the comprehensive financing costs of enterprises. The first is to promote open and transparent credit rates and fees. Strictly regulate the fees and charges of financial institutions, and urge intermediaries to reduce fees and make profits. The second is to strengthen positive incentives and assessments, strengthen credit support for orders and credit companies, and better serve the real economy. The third is to strengthen multi-sectoral communication and coordination, form a policy synergy, and promote multiple measures to reduce the cost of corporate financing and other channels.

Global interest rate cuts look forward to the direction of domestic monetary policy

In early August, the central bank issued the China Monetary Policy Implementation Report for the second quarter of 2019. The report carried out a more comprehensive inventory of China’s monetary policy implementation in the first half of the year. From the perspective of monetary policy, the report pointed out that a prudent monetary policy should be tight and moderate, maintain a reasonable liquidity, and implement counter-cyclical adjustments in a timely and appropriate manner to guide the broad-based monetary growth rate of M2 and social financing to match the nominal GDP growth rate.

Since the Fed cut interest rates, many central banks around the world have joined the “reduction of interest rate camps”. 28 countries or regions have chosen to cut interest rates to varying degrees, and have also strengthened domestic expectations for monetary policy liberalization. Looking forward to the direction of domestic monetary policy in the second half of the year, Dong Xizhen believes that China’s monetary policy will still adhere to the stable main tone, maintain a moderate degree of flexibility, use a variety of monetary policy tools, and increase the frequency of pre-adjustment and fine-tuning, but there will be no “big flood irrigation”. “The situation.” From the perspective of risk prevention, it does not support the further easing of monetary policy. At the same time, the deposit reserve ratio still has a certain room for downward adjustment, but the possibility of targeted RRR reduction is even greater. Dong Xizhen believes that as for the reduction of the benchmark interest rate for deposits and loans, the possibility is not high in the short term.

Economic growth has been propped up by real estate. iFeng again:

In this general rise in housing loans, the interest rates for first and second home loans of several banks have increased, and the approval of loans has been stricter. According to a reporter from China Business Daily, the China Banking Regulatory Commission recently requested banks in 32 cities to conduct a special inspection of their real estate loan business, with banks with large real estate loans bearing the brunt of the inspection. In addition, as banks have already made relatively large loans to the real estate industry before, the intention to control the size of loans by tightening credit is now more obvious.

Reporters learned through investigation that mortgage interest rates in second-tier cities such as Hangzhou, Suzhou, Nanjing, Xi ‘an, Zhengzhou, Nanning, Wuhan and other cities have increased considerably. Some banks have raised the loan interest rate for first-tier apartments directly from the benchmark to 20%, while the loan interest rate for second-tier apartments has risen as high as 25% from the benchmark. In addition, banks have tightened their scrutiny of the use of funds for consumer loans and operating loans for housing loans to prevent funds from bypassing the property market.

Interest rates are high and the wind has changed?

In order to solve major problems such as people’s livelihood housing, supervision has been implementing differentiated policies for mortgage interest rates. We will strictly control and raise the loan ratio limit and loan interest rate for the purchase of multiple apartments, while we will be more lenient with the loan interest rate for the first apartment.

It is understood that as early as three years ago, the state-owned big banks in many places were still able to implement a discount of 8.5% or even lower on their first apartments. However, now the trend of bank loans has changed, and the first apartments, which are just needed, are not immune from this general rise in housing loans.

Chen Hua (not his real name) is planning to get married in Changsha. Buying a house is the top priority before marriage. However, when he contacted several banks in the city, he found that the interest rate of the house purchase loan has changed greatly from six months ago.

“Compared with the beginning of the year, the house price in Changsha is still relatively stable, but the interest rate on the house loan has gone up a bit exaggerated.” Chen Hua said that the bank loan for the first apartment had a discount on the benchmark interest rate, which was up to 5%. Today, the loan interest rate of most banks has risen to 15% above the benchmark.

He told reporters that a 15% rise in the benchmark mortgage interest rate seemed insignificant, but it meant that a loan of nearly 1 million yuan would have to be repaid more than 400 yuan per month. According to the 30-year term of the loan, the additional interest required for the loan is close to 150,000 yuan. “Since most bank loans are repaid in equal amounts, the part repaid in advance is more interest, which is even more uneconomical for buyers who repay their loans in advance.”

Reporters found that the interest rate for bank loans in Changsha, Hunan province, has risen more widely, especially in joint-stock banks, with the interest rate for most first homes rising 15% from the benchmark. The loan interest rate for the second suite is mostly 20% higher than the benchmark, but the loan interest rate for the second suite of a big state-owned bank has also risen to 25% higher than the benchmark, which also means that the loan interest rate has broken “6”.

In fact, Hangzhou, Suzhou, Nanjing, Wuhan, Zhengzhou and other places have also received frequent news of bank mortgage interest rate increases in the near future. Take Nanjing as an example. In May this year, many banks raised the interest rate for first-home loans by 5% on the benchmark, which is currently 15% on the benchmark, with a further upward trend.

Market sources said that the mortgage interest rate of some banks in Xi ‘an has increased significantly. The loan interest rate for the first suite has increased by 20% according to the benchmark, which is even higher than the loan interest rate for the previous second suite.

Compared with the second-tier cities, Beijing, Shanghai, Guangzhou and other first-tier cities have smaller changes in mortgage interest rates. Reporters visited several large state-owned banks and joint-stock banks and learned that the current loan interest rate for the first suite of most banks is 10% higher than the benchmark, while the loan interest rate for the second suite is adjusted from 10% higher than the benchmark to 15% higher than the benchmark.

“The current change in mortgage interest rate may be closely related to the policy, and the scale of bank loans may continue to shrink in the future.” A large state-owned bank disclosed to reporters that the rise in mortgage interest rates is determined by the overall market factors, and the bank will make adjustments according to the actual situation.

Tighter Supervision on Bank Shrinkage

The rise in mortgage interest rates is closely related to the tightening of regulatory policies. In order to strengthen the macro-control of the real estate market, the supervision will severely crack down on the illegal entry of funds into the real estate market and will not relent in its punishment.

It is understood that since July, the real estate trust has shown obvious signs of “braking”, the supervision has implemented balance management, and the approval of products has slowed down.

It is noteworthy that the general office of the China Banking Regulatory Commission recently issued the Notice of the General Office of the China Banking Regulatory Commission on Carrying out Special Inspection of Real Estate Business of Banking Institutions in 2019, deciding to carry out special inspection of real estate business of banking institutions in 32 cities, and will severely investigate and punish all kinds of illegal acts that divert funds into the real estate industry through misappropriation or diversion.

Reporters learned that the special inspection will specifically target financial institutions with large real estate loan volume and will conduct spot checks on relevant business specifications.

“The real estate industry is a lever game. With the strong support of credit, house prices may have an upward trend. Supervision and strict control of real estate credit is also a policy of strict control of real estate to avoid risks caused by bubbles. ” The aforementioned state-owned big banks said.

The source told reporters that under the supervision policy, banks will reduce the amount of mortgage loans and tilt credit resources to first-tier cities, which will reduce the supply of second-tier cities and raise the interest rate of loans. “The mortgage market will cool down in the second half of the year, and banks will increase their control over the total amount.”

A stock broker told reporters that in the past two years, the bank’s credit to the real estate industry has not been small in scale, with annual growth even reaching double digits. “As the supervision has tightened on real estate financing at this time, banks will also follow up with the contraction in credit.”

“Housing loans will still be approved, but it is more difficult than before. There is no such big discount on interest rates.” The source said.

Once property slows and everything begins to fall apart, a la 2015, the PBOC will be forced to slash the cash rate. But it can’t do it before the Fed moves aggressively or the CNY will collapse. And the Fed can’t move before Chinese weakness blows back into US economy, most obviously via oil. The trap must snap shut before the system can reset.

Sell iron ore and AUD.

David Llewellyn-Smith
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