Has the Chinese government given up on rebalancing already?13 June, 2012, 12:24. Posted by Zarathustra
As more and more evidence suggests that the Chinese economy is slowing rapidly, there is also more and more evidence that the Chinese central government has given up on real estate market curbs even though they say they will continue, and they have given up cleaning local government debts even though they said they were cleaning them up. And by giving these up, they have also unofficially given up on rebalancing the economy away from investment driven to consumption driven once more.
The China Banking Regulatory Commission (CBRC), for instance, has dropped the proposal that risk-weighting for second home mortgages to be higher than the first home (via Sina). Also, various media are reporting that banks are now allowed to offer as much as 30% discount from benchmark rates for mortgages, a clear sign of saying one thing (i.e. continue to tighten real estate market) and doing another thing (easing mortgages).
Also, as we mentioned that the government is planning to bring future investment projects forward, and that implies that banks have to lend to fund these projects. Because Chinese banks are policy driven, so while traditional tools of easing monetary policy like cutting interest rates and reserve requirement ratio will not stimulate lending in a liquidity trap situation, forcing banks to lend will do. Indeed, we have seen a consistently weak loan demand in the past few months, indicating that China is probably already in a liquidity trap. However, new loans ended up higher than expected as the rush to lend in the final week of May took place. Notably, the final rush to lend coincide with the increasing chatters that China will bring forward investment projects and ease mortgages.
This is extremely pathetic. On one hand, the government wanted to stop speculations in the real estate market. On the other hand, it seems as if the government were hoping that real estate speculations could help stabilise the slowing of the economy. So in essence, the government is hoping that speculators can bail out troubled local governments and real estate developers. On one hand, the government wanted to clean up local government debts problem. On the other hand, it seems as if the government were hoping that local governments will once again borrow and invest for the sake of manufacturing GDP growth.
This is again consistent with the thesis of Prof. Victor Shih that what the elites that run the country are most concerned is not high inflation, but no inflation. It is massive investment projects and inflation which give these corrupt elites chances to gain massive profits. Corrupt government officials gave approvals for massive projects, and related parties like their relatives and friends (and people who have bribed them) would be contracted. Because they were well-connected, they could borrow cheaply from banks even though other private entities couldn’t (and occasional, they just steal the money). And when they built the stuff, they used every possible ways to cut corners in order to have maximum profit. High inflation allows these people to obtain even greater wealth by putting money into real estate investment, for example. Massive debts in the economy weren’t the biggest concern for them, because as long as they have the ability to inflate the economy again and again. It will only become a problem when they have lost ability to reflate the economy.
We have already seen inflation coming back down to 3% in May, and with debt deflation looming, they ease monetary policy and bring investment forward. Sadly, this is yet another confirmation that those who really run China are most concerned about no inflation, not high inflation, and they are already attempting to reflate the economy once more. If the external environment does not deteriorate from here (which is a bit of a wishful thinking), this may (or may not) stabilise economic growth in the short-term, but at the same time it is a signal that people running the Chinese government has already given up on rebalancing its economy.
From the macroeconomic perspective, this is a choice between maintaining high overall economic growth at the expense of households’ consumption and rebalancing the economy at the expense of corrupt officials and elites. Sadly, those who run the government are choosing growth and personal wealth.