ANALYSIS-Trapped cash destroys China’s political plans

By Samuel Shen and Brenda Goh

SHANGHAI, August 16 (Reuters)China’s surprise key rate cut this week highlights a dilemma Beijing faces as authorities try to revive an economy awash with cash in the financial system but still lacking in consumer demand.

Monday’s 10 basis point cuts to the People’s Bank of China (PBOC) 7-day and 1-year lending rates are little incentive for banks to increase lending – they’re already lending to each other others at much lower rates – and analysts say more fundamental measures are needed to rekindle confidence in an economy ravaged by a housing crisis and ongoing COVID lockdowns.

The PBOC faces the challenge of a “partial liquidity trap,” says Alicia García Herrero, chief Asia-Pacific economist at Natixis, because interest rates are not low enough to be defined as a trap Japanese-style liquidity, but “cash remains trapped in the biggest banks” due to growing systemic risks.

Beijing needs more “heterodox measures” to spur growth, such as injecting liquidity into small banks that lend to small businesses, while creating moral hazard, said García Herrero.

Other analysts say China needs measures beyond monetary easing to revive its economy, such as less severe COVID policies and government bailouts for struggling companies.

Rocky Fan, an economist at Guolian Securities, said the slowdown in the property market is affecting confidence as people dare not buy homes amid a debt crisis and boycotts to pay mortgages on unfinished homes.

“You have to fix the real estate issues to get the economy moving again, but it’s a tricky issue,” Fan said.

“I don’t see a solution unless the government bails out all struggling developers, at the risk of moral hazard.”


Official data on Monday showed China’s economy slowed across the board in July, dashing hopes of a post-lockdown economic boom.

Going against a global trend of higher rates to fight runaway inflation, China has eased its monetary policies and repeatedly urged banks to lend more. Yet new bank lending in China fell in July as general credit growth slowed, reflecting anemic demand.

The banking system, however, is full of cash. China’s broadest measure of money supply, M2, which includes cash and deposits, jumped 12% last month, the fastest pace in six years. Chinese households added 10.3 trillion yuan ($1.52 trillion) in deposits in the first half.

“Chinese banks are hoarding deposits at an alarming rate as businesses and households save too much,” Jefferies analysts said in a note.

Monday’s rate cuts are “a response to a shortage of spending, which has led to an influx of deposits,” the brokerage said, adding that the move “is not likely to move the economic needle.” .

David Chao, global market strategist, Asia-Pacific ex-Japan at Invesco, said the rate cut “is a good start, although more policy support is needed, particularly to put a floor on the market. real estate and boost household and business confidence”.

Concrete steps could include lowering mortgage rates, easing payment requirements, reducing bureaucracy and easing debt limits for developers, he suggests.


Kaiwen Wang, China strategist at Clocktower Group, said that with short-term interbank rates already near record highs, “it’s unclear whether the PBOC will feel comfortable in a much higher rate environment. lower given its concern over financial bubbles”.

Even before Monday’s rate cuts, China’s interbank market rates were already well below key rates, making the PBOC’s decision redundant.

Money market fund (MMF) balances hit a record 11 trillion yuan in May, overtaking Europe as the world’s second largest MMF market, after only the United States, according to Fitch.

There are already signs of foaming in some corners of the financial markets, with some investors chasing higher yields.

Trading in the domestic money market jumped 44% from a year earlier in June, according to the latest official data, while the average daily turnover of exchange-traded bonds more than doubled from the previous year. previous year, amid signs of higher leverage trading.

In the stock market, outstanding margin loans hit a four-month high of 1.64 trillion yuan, while the CSI1000 small cap index .CSI1000I – more vulnerable to speculative trading – jumped more than 40% from an April low to a five-month high.

“Rate cuts can only trigger a carnival in the bond market,” said Xia Chun, chief economist at wealth manager Yintech Investment Holdings, referring to a jump in bonds after the political change that saw contracts drop. term on the Chinese Treasury at 10 years. CTSc1 peaked in two years.

“The problem is that there is no shortage of cash, but households and businesses have gloomy expectations and low confidence. It’s a typical balance sheet recession.”

($1 = 6.7928 Chinese yuan renminbi)

(Reporting by Samuel Shen and Winni Zhou; additional reporting by Jason Xue Editing by Vidya Ranganathan & Shri Navaratnam)

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