The debt dragon: A monster is rearing its ugly head in China and it is called debt. Whether government, corporate, or even household, it is all on the rise, shooting up from 130 per cent of economic output in 2008, to 200 per cent today.
What would you like to know about China’s debt addiction and its implications for the country and world economy? How did it get so big? Who are the culprits? How much worse could it get? The FT will tackle the Chinese credit habit in a three-part series starting on Tuesday. If you have questions on the subject, simply post them in the comment box below – along with your ft.com name or pseudonym – and I will ask a selection of them to the author of the series Simon Rabinovitch, China correspondent, in a podcast on Wednesday.
The Bank of Japan did its bit for Sino-Japanese relations on Wednesday by publishing a paper which calls on Chinese policymakers to do what Tokyo did in the 1970s and rebalance their economy.
Accordingly to the paper, written by two BoJ economists, Chinese growth has relied too heavily on investment. This has meant that workers have failed to get their fair share of the spoils from rising profits. It has also limited job creation in urban areas and contributed to a decline in productivity growth. Plus it’s bad for the environment.
So what is to be done? There are two lessons to be learnt from Japan. Read more
For the fourth time in less than six months, China has raised rates. The quarter point increase leaves the one-year deposit rate at 3.25 per cent and the one-year lending rate at 6.31 per cent, each a percentage point higher than October of last year. Inflation rose to 4.9 per cent in the year to February, driven higher by food price inflation.
Other tightening measures are being gradually but regularly applied, notably the reserve requirement, which has been raised seven times since October and now stands at 20 per cent for large banks, following the most recent increase in mid-March. Read more
Hong Kong’s yuan market is set to receive a boost from China’s central bank. The People’s Bank of China plans to raise the territory’s yuan clearing rate and is considering an increase in deposit rate, too, Reuters reports. Rates in Hong Kong are significantly lower than they are on the mainland, and unnamed sources quoted by the news agency say the planned moves are unlikely to align rates in one step.
An increase in deposit rates would encourage companies to leave yuan in Hong Kong rather than sending them back to the mainland. Analysts also expect an increase in the supply of yuan bonds as investors hope for higher yields on forthcoming issues. From Reuters: Read more
Large Chinese lenders will need to keep a fifth of their deposits with the central bank from March 25, after the People’s Bank of China announced an increase in reserve requirements. Individual banks that are lending too much might be targeted with further specific measures. Small-medium banks are probably now required to hold 16.5 per cent of loans, though, as ever, this is unclear from the Bank’s statement.
Tightening was expected – even overdue – but comments from the PBoC had suggested it might be a rate rise. This is the third rise in reserve requirements this year and follows a rate rise in February. The last raise in reserve requirements was also half a percentage point, and was announced a month ago, on February 18. Consumer price inflation held at 4.9 per cent in the year to February – the same as January, but above 4.6 per cent in December and also above forecasters’ February expectations of about 4.7 per cent. Read more
Interest rates are back in vogue at the People’s Bank: the concern over capital inflows shouldn’t reduce the case for using them, governor Zhou has said. He also said that raising banks’ reserve requirements, which reduces the amount available to lend, is a liquidity management tool that cannot necessarily replace other monetary tools. China has raised rates three times since October last year and raised the reserve requirement five times. There has been a relatively long gap since the last monetary tweak, on February 18.
These pro-interest rate comments are courtesy of SocGen research, taken from the PBoC press conference at China’s annual plenary session of the National People’s Congress. Read more
The pace is picking up. China is to tighten policy again, raising reserve requirements by 50bp effective February 24. The news follows a rate rise ten days ago. The People’s Bank’s promise of “intensive adjustment” to its monetary policy in Q1 hasn’t disappointed; the last reserve requirement hike, also of 50bp, was announced on January 14. Reserve requirements for big banks are believed to be 19.5 per cent now; they are 16 per cent for smaller banks.
Some small- and medium- sized deposit-taking banks will need to keep more funds with the central bank following a lending binge at the start of the year, according to reports in the official China Securities Journal.
Without citing sources or giving details, the newspaper said the People’s Bank of China had tailor-made reserve ratios for various city commercial banks, reports Reuters. Bloomberg points out that it is unclear whether the ratio has risen or fallen. Given the general move to combat inflation in China, an overall tightening is likely, however. Read more
Domestic inflation seems a much likelier explanation for the recent appreciation of the yuan than American pressure. Many commentators have referred to the Chinese “bowing to pressure” or otherwise implied that the authorities have – without apparent trigger – capitulated to Western pressure. A quick look at the timing suggests otherwise. China is in the middle of a tightening extravaganza, raising interest rates and reserve requirements to tackle inflation. A strengthening yuan can have exactly the same effect, by making imports cheaper. Timing is only circumstantial evidence, of course, but it is something.
A tightening measure was about due in China: it’s been 25 days since the last one, against an average of 17 days since October.
The People’s Bank of China just increased rates by a quarter of a point, which raises the one-year deposit rate to 3 per cent and the one-year lending rate to 6.06 per cent. The last move to stem inflation and mop up excess liquidity was a raise in reserve requirements on January 14. MPC member Li Daokui said at that time a rate rise was likely in the first quarter and indeed spoke of an “intensive adjustment” in this period. The raise is effective tomorrow.
Inflation might have risen to 6 per cent in January, Bloomberg reports from analysts at Daiwa Capital Markets. In December, it rose to 4.6 per cent. The economy grew by 9.8 per cent in the fourth quarter, faster than the pace in the previous three months. See below for a history of China’s tightening: Read more
An important question about US inflation in the coming year or two is the extent to which rising commodity prices will feed into core inflation. As discussed in the piece that Chris and I did last week, the feed through from headline to core has been very low – in fact close to zero – in recent years.
One channel by which an impact could come is if rising commodity prices push up costs for manufacturers in the developing world and that translates to higher prices for imported manufactured goods in the US. In that regard, and in light of China’s strong GDP and high inflation figures today, this is an interesting chart:
China and Russia sold off substantial amounts of US debt during December – a month that saw the biggest treasuries sell-off since the collapse of Lehman’s. Market commentators entered denial mode: this was “not necessarily the start of any particular trend,” said one. “It’s too early to infer that China is shifting its diversification stance,” said another.
All this denial suggests the market is waiting for bad news – a theory backed up by volatility futures, which suggest a great deal of volatility is constantly expected roughly two months away. Whatever the date, Bad News is due in roughly two months’ time (these are VIX futures, and yes, you can buy a future on just about anything). Are these connected? Here’s one theory.
US borrowing costs have been kept artificially low for years, thanks to demand for US treasuries by world investors. The fact that the dollar is a reserve currency, and is considered safe, has kept demand for the debt high even when it is not a profitable investment. The normal laws of supply and demand are distorted. The people buying and the people selling are doing so for different reasons.
This asymmetry should be a cause for concern. Read more
Every two weeks, on average. That’s how often China is introducing some form of tightening at the moment. The People’s Bank has just increased the reserve ratio again, by 50 basis points, or a half of one percentage point. This increases the amount of cash banks have to keep with the central bank, thus reducing the amount available to lend. Our calculations suggest rural and small-medium sized banks will have to keep 15.5 per cent of their deposits with the central bank, while larger banks will need to keep 19 per cent. In October of last year, PBoC introduced a further division between banks, increasing the reserve requirements of the six largest banks temporarily, keeping the ratio of other large financial institutions on hold. If that division has now expired, the ratio for the six largest banks is now also 19 per cent. The move will be effective January 20.
Mopping up liquidity in this way is one tool to combat inflation. Another is to let one’s currency appreciate. Signals have been sent today from a senior central bank official that China will allow further flexibility in the yuan. “Flexibility” is a one-way bet in the markets at the moment, and the State Administration of Foreign Exchange today set the central parity rate of the yuan at 6.5896 against the dollar, a new record.
China’s biggest banks will need to place 19 per cent of their deposits with their central bank from December 20. The People’s Bank of China has raised the depository reserve requirement by 50bp for the third time in five weeks, and the sixth time this year. Presumably – though this is not detailed in the release – the reserve requirement for China’s small- and medium- sized banks will be 17 per cent.
No reason was given for the move, which will mop up excess cash in the system and dampen inflation. An alternative tightening move – to raise interest rates – has not been taken since October 20. The last two reserve-requirement raises were effective November 16 and 29.
Monetary tightening in China just sped up. The Chinese central bank has just announced another 50bp increase in the deposit reserve ratio – which will happen at the end of November. The previous hike on November 10 was also 50bp and was expected to remove about $45bn liquidity from the Chinese economy.
Presumably – though this is not detailed in the release – the new reserve ratios will be: 18.5 per cent for six largest banks; 18 per cent for other large banks; and 16 per cent for small- and medium- sized banks. China is also raising rates – a 25bp hike took place a month ago and there have been further rumours since then and today in the markets (though perhaps the reserve increase will substitute). Read more
Chinese equities have plummeted on rumours that the People’s Bank of China plans to raise rates again to combat inflation, which came in at 4.4 per cent for October. Consumer prices rose substantially during the month – the annual rate was just 3.6 per cent in September.
The Shanghai Composite lost more than 5 per cent, with financial services and resource sectors hit particularly hard and dozens of stocks falling by their 10 per cent daily limit. Read more
Former Fed chair Alan Greenspan has an article in today’s FT. It’s quite blunt about China and the US. “Both may be right about each other,” he says. “America is pursuing a policy of currency weakening,” while China’s reserve accumulation has caused exchange rate suppression for “competitive export advantage”. China and the US aren’t just hurting each other: the joint effect of their policies is to strengthen other currencies, placing those countries at a disadvantage.
Unlike most pundits hand-wringing over the current state of play, Mr Greenspan proposes a solution. It is quite radical. The G20, he says, can propose a new rule through the IMF that “limits the accumulation of reserve assets and sterilisation of capital flows”. “It would be easier to maintain and control than a stability and growth pact,” he says, referring to the “failed” eurozone agreement.
Well, yes, it would be easier. But the fact he has considered a stability and growth pact for sovereign states with separate currencies is staggering. The monetary proposal is also radical. Read more
More on that China rumour (which is no longer a rumour). The People’s Bank does plan to raise the deposit reserve requirement by 50bp, broadening and making permanent a temporary measure introduced almost exactly a month ago. The move, which takes effect on November 16, is expected to reduce liquidity by $45bn.
Back then, the measure affected six large commercial banks for two months. Four of those six banks will now see their deposit reserve requirement ratio (ratio) rise to 18 per cent. Other large deposit-taking institutions will see their ratio rise to 17.5 per cent, while small- and medium- sized banks will have a ratio of 15.5 per cent. Read more
A deputy governor at the People’s Bank of China has indirectly criticised the Fed’s $600bn stimulus plan, saying emerging market economies will have to stay alert for inflation and bubbles as a result of the scheme. Ma Delun also said the stimulus might also increase global imbalances, though it might help the US economy “to some extent”.
Similar comments – which amount to indirect accusations of selfish irresponsibility – were levelled by the Brazilian central bank governor on Friday. Henrique Meirelles said: “excess liquidity in the US is creating problems in other countries” and that this should be addressed at G20 meetings in South Korea. Read more