Introduction
In September, the Chinese authorities announced a package of measures to stop the fall in real estate prices, encourage investment in assets other than real estate, and bolster share prices.
The measures are drawn out of the playbook of the European Central Bank (ECB), the US Federal Reserve System (the Fed) and the Bank of England, only about fifteen years later.
What does the intervention consist of?
The package was announced without the fine detail. The initial announcer was the People’s Bank of China (PBOC) but, given China’s governance structure, elements need to be confirmed by other central and regional government entities, and even re-announced by such entities as if they were their own.
Markets jumped in response but have slid back, and Trading Economics1 claimed on 29th October that investors were ‘cautiously’ awaiting ‘a high-level meeting where authorities [the National People’s Congress] are expected to unveil more stimulus measures’. Are these measures new compared to what PBoC already stated, or a direct re-announcement, or a re-announcement with detail?
Trading Economics reported that the PBoC had announced on 28th October that it will ‘conduct monthly outright reverse repo operations in its latest effort to boost liquidity, adding to the central bank’s monetary policy toolbox’. This sounds like what the asset-management company DWS reported on 1st October; DWS noted it would become cheaper for the borrowing bank by 0.20% per annum.
What is the intervention for?
The twin aims of the intervention are:
- To stop the fall in real estate prices, to get Chinese citizens to invest in Chinese real estate again, and to stop real estate developers going under and their share prices collapsing to zero;
- To supercharge the Chinese stock market in which the main Shanghai Composite Index fell as low as 2,700 in February 2024, had limped up to 3,177 in June, before stumbling back to 2,700 in mid-September – several different types of market actor should be enabled to buy more shares.
The index is now back near its June level, at 3,270, having initially shot up to 3,500.
The Chinese consumer really needs to get spending to buy up all that real estate and all those shares. They will probably need to be enabled to borrow against the one to invest in the other. What’s the Mandarin Chinese character for a Ponzi Scheme?
PBOC announcements
The UK Guardian reported on the initial announcement by the PBOC on Tuesday 24th September:2
- A reduction of the interest rate on existing mortgages of 0.5%;
- A reduction of the customer’s deposit when buying a second home from 25% of the price to 15%;
- An easing of restrictions on institutions borrowing to invest in securities that are quoted on Chinese exchanges, under which ‘up to 468 billion yuan (US$66 billion) worth of assets could be used in the stock exchange programme to support extra investment’.
The Guardian relayed that PBoC ‘expects the combination of lower interest rates and lower deposits to help about 50 million households, reducing the total interest bill by about 150 billion yuan (US$21 billion) a year’. DWS estimates that this could release ‘2.5% more annual disposable income’ for the households affected.
Lower level of detail from DWS3
DWS, on 1st October, gave a lower level of detail:
- Reduction of 0.50% in the proportion of liabilities to depositors that banks have to hold as reserves in their accounts at the PBoC instead of using the amount to make loans, the reserves ensuring the banks’ liquidity;
- 20% reduction in the interest rate payable by banks when they borrow from the PBoC using the ‘reverse repurchase agreement’ instrument;
- A new equity lending facility at the PBoC, whereby non-banks can use so-called ‘high-quality equity holdings’ as collateral for loans directly from the central bank, with an initial ceiling of 500 billion yuan (US$70 billion), which is 32 billion yuan (US$4 billion) more than The Guardian stated – unless there are two different facilities;
- Companies with shares listed on a Chinese exchange can apply for loans from the PBoC for share-buybacks, with the shares then acting as collateral for the loan, with an initial ceiling of 300 billion yuan (US$42 billion).
Property market4
The new watchword is liberalization, or even crash liberalization, given some of the arcane, Soviet-style restrictions that were in place to limit ownership of multiple properties:
- Different provinces apply varying measures to restrict home purchases, such as a minimum tax-paying residency period, a maximum number of properties that a family can own, and the minimum size of the deposit;
- These are being weakened or even dropped;
- The minimum deposit seems to be being guided towards the global guideline of 15%, whether it is for a first purchase or further ones.
The PBoC steps up to join its global peers – by aping their mistakes and learning no lessons along the way
PBoC has had sixteen or more years to observe the problems inflicted on Western capitalism by the ECB, the Fed and the Bank of England. Their cures for the Global Financial Crisis, the Eurozone Financial Crisis and the Covid-19 Pandemic have been worse than the malady.
The PBoC replicates the ECB’s Pandemic Emergency Purchase Programme by becoming a direct commercial lender into the non-bank financial institution sector, without its having its own credit risk assessment department. PBoC appears willing to rely primarily on the security lodged by these borrowers, and not on the borrowers’ intrinsic creditworthiness. For that purpose, it intends to rely on external ratings and representations that this or that security is of ‘high-quality’.
It starts to act on a quota system for its programmes, just like the ECB and its Targeted Longer-Term Refinancing Operation.
Breach of frameworks agreed with the Fed, ECB and Bank of England
While it apes its central bank peers in some ways, PBoC blows a hole right through agreements made with them, the ones intermediated by the Bank for International Settlements in Basel and aimed at averting another Global Financial Crisis:
- Reducing banks’ reserves requirements without apparently announcing the impact of this measure on its banks’ compliance with Basel Liquidity Coverage Ratio;5
- Permitting correlation risk by lending to a company on the collateral of its own shares to enable a share buyback, in contravention of Basel Capital Standards. The Basel documents discount a company’s own securities as being eligible security for loans to it.6
Conclusion
The package was announced as being dramatic, which means the problems probably are dramatic. Whether the solutions match them is another matter. Consumers are expected to buy more houses and more shares, with the US$21 billion per annum (0.12% of GDP)7 they will not now be paying on their current mortgages. Consumers are thereby co-opted into delivering the statistical results the authorities want, whether or not it is in their own long-term financial interests.
US$120 billion (0.67% of GDP) of liquidity might be created through the PBoC’s various round-trip operations, and banks will pay less on what they borrow from the PBoC via reverse repo, as well as lodging less of their customer deposits with it.
To achieve stimulus of something around 1% of GDP the PBoC departs from global agreements, makes their banks less compliant with those frameworks, less liquid, and less well capitalised (without stating by how much).
The Fed, ECB and Bank of England have not reacted. Is that fear? Or failure to draw the right conclusions? Or an awareness of what a sham these frameworks are anyway and how little they protect against a repeat of the last Global Financial Crisis?
1 https://tradingeconomics.com/, accessed on 28, 29 and 30 October for the quotations and statistics in this piece that are not attributed elsewhere
2 https://www.theguardian.com/world/2024/sep/24/china-economy-stimulus-package-measures-yuan-pbc accessed on 30 October 2024
3 https://www.dws.com/en-gb/insights/cio-view/cio-flash/cwf-2024/chinas-rescue-mission/ accessed on 30 October 2024
4 https://www.cnbc.com/2024/09/30/china-property-stocks-rally-after-major-cities-ease-homebuying-restrictions.html accessed on 30 October 2024
5 https://www.bis.org/publ/bcbs238.htm, accessed on 30 October 2024
6 ‘In order for collateral to provide protection, the credit quality of the counterparty and the value of the collateral must not have a material positive correlation. For example, securities issued by the counterparty ─ or by any related group entity ─ would provide little protection and so would be ineligible’ – Article 124 on page 33 of the BIS’ anchor document for Basel II being BCBS128 entitled ‘International Convergence of Capital Measurement and Capital Standards’
7 Trading Economics state that Chinese 2023 GDP was US$17.795 trillion
Photo by A F
