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China unveils structural reform to boost real economy
By Chris Leung |
July 1, 2013, Monday
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Print Edition
Print Edition
THE latest tough act orchestrated by the People's Bank of China is astounding. Counterintuitive as it seems, by refraining from injecting liquidity until the eleventh hour, authorities are mitigating risks in the banking sector.
Authorities either know beforehand which banks and the associated stakeholders will be burnt in the act, or they want to make use of this particular event to expose overextended banks.
We should not over-analyze the impact of the liquidity squeeze on the real economy. Supply of money, although sufficient(M2 growth in May was 15.8 percent), was not really driving real economic activities anyway in the past nine months.
Many large companies are still spending heavily and making large purchases in wealth management products. There is also a lot of hot money seeking speculative investments and private lending is still widespread, not to mention the still glistening property market. In other words, money was just changing hands. If the problem is not rectified now, it will culminate in an endgame similar to what happened in the US in 2008.
If we ascribe to this logic, the next question is when the central bank will complete this mission. How heavy will the punishment be? Will China allow some banks or local government financing vehicles to default which in turn trigger a bigger domino effect on the broader financial market and real economy?
Judging from authorities' stance, a "credible threat" has already been made. They can ease liquidity a bit to observe for a while before making the next move. Judging from the stance of the authority, near term tightness shall prevail.
In line with its efforts to reform the banking sector, China will liberalize interest rates very soon - the ceiling on deposits and floor on lending rate will likely be relaxed further. The Chinese Cabinet has said China would push ahead with interest rate liberalization. Separately, the central bank this month mentioned in its 2013 financial stability report that is was ready to set up a deposit insurance system as soon as this year.
Monetary policy decision now is probably made at the highest level. China is set to go into a structural reform phase that many of us have not seen before. A good cause however does not preclude market volatilities in the near term.
Authorities either know beforehand which banks and the associated stakeholders will be burnt in the act, or they want to make use of this particular event to expose overextended banks.
We should not over-analyze the impact of the liquidity squeeze on the real economy. Supply of money, although sufficient(M2 growth in May was 15.8 percent), was not really driving real economic activities anyway in the past nine months.
Many large companies are still spending heavily and making large purchases in wealth management products. There is also a lot of hot money seeking speculative investments and private lending is still widespread, not to mention the still glistening property market. In other words, money was just changing hands. If the problem is not rectified now, it will culminate in an endgame similar to what happened in the US in 2008.
If we ascribe to this logic, the next question is when the central bank will complete this mission. How heavy will the punishment be? Will China allow some banks or local government financing vehicles to default which in turn trigger a bigger domino effect on the broader financial market and real economy?
Judging from authorities' stance, a "credible threat" has already been made. They can ease liquidity a bit to observe for a while before making the next move. Judging from the stance of the authority, near term tightness shall prevail.
In line with its efforts to reform the banking sector, China will liberalize interest rates very soon - the ceiling on deposits and floor on lending rate will likely be relaxed further. The Chinese Cabinet has said China would push ahead with interest rate liberalization. Separately, the central bank this month mentioned in its 2013 financial stability report that is was ready to set up a deposit insurance system as soon as this year.
Monetary policy decision now is probably made at the highest level. China is set to go into a structural reform phase that many of us have not seen before. A good cause however does not preclude market volatilities in the near term.
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