China’s low interest rates fail to stimulate lending in the economy – ‘liquidity trap’

Eamonn Sheridan

Saturday 13/08/2022 | 05:05 GMT-0

08/13/2022 | 05:05 GMT-0

China Friday funding data. New lending has crashed, even as the money supply (M2 + 11%) has risen sharply – i.e. lots of cash in circulation but not in demand:

The chief China economist at Pantheon Macroeconomics says such a combination of data is a “classic sign of a liquidity trap” .

  • “Liquidity is plentiful, but no one wants it.”

The remarks come from a Bloomberg article (closed, but an unclosed article can be found here):

  • The gap between liquidity

    Liquidity refers to the extent of a financial instrument’s ability to be bought or sold without causing price fluctuations. So, if an asset is extremely liquid, it means that one can trade that asset knowing that their specific trade will not create significant movements in the market. This is because there are so many traders both long and short, generating huge volume for that particular asset. Liquidity in the foreign exchange marketTake the example of the foreign exchange market – it is the most liquid market in the world, since many banks, hedge funds and individual traders are involved in the buying and selling of vast cumulative amounts of currencies each day. In fact, over $5 trillion is traded daily, as reported by the Bank for International Settlements. If a trader wants to go long the EUR/USD currency pair, they will have no trouble finding traders who want to go the opposite direction, due to such abundant liquidity. EUR/USD is the most liquid trading instrument in the world, regardless of the market. It is extremely easy to buy or sell, with an immense amount of trading activity for the pair. Liquidity reflects the amount and frequency of the asset that is traded, i.e. the more an asset is traded, the more liquid that asset is, making it virtually easy to buy and sell the asset. asset. Similarly, the less an asset is traded, generally the less liquid the asset is, making it more difficult to buy or sell that asset. Needless to say, liquidity is one of the key attributes a trader looks for when deciding whether or not to continue trading an instrument, as it tells the trader how stable a market is despite the masses of trades being undertaken. . This is exactly why the forex market is so attractive, since its liquid environment allows for massive trading volumes without much effect on the exchange rates of currency pairs.
    Read this term and bank lending also increases financial risks, as market interest rates fall well below the policy rates set by the central bank.

  • “Cash is building up in the interbank market and there is even a risk that money will be directed out of the real economy into the markets,” said Ming Ming, chief economist at Citic Securities Co.

The risk of money flowing into the markets could very well translate into a bullish entry for Chinese equities.

ps. On Monday, an MLF matures. A majority of analysts expect the PBOC not to fully defer the maturing amount (i.e. a net withdrawal of cash). On the 20th we get the monthly prime rate of the PBOC loan (preview here).

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