Policy easing can begin with small steps
Source: Agencies |
October 12, 2011, Wednesday
|
Print Edition
Print Edition
CHINA'S purchases of beaten-down bank shares may be one of several baby-steps along an easing path that eventually leads to interest rate cuts.
It will probably be a slow process. Before China reaches for a blunt instrument such as interest rates, it may first unwind some of the tightening measures put in place over the past few months to try to prevent lending from getting out of hand.
Options might include suspending initial public offerings, as it did in 2008; easing up on so-called "punitive bills" that banks are sometimes required to buy as a means of restricting the flow of credit; or injecting a bit more money into the economy through regular open-market operations.
This is not 2008. China's economic growth looks far more sturdy than it did after the financial crisis struck. But there are a few air pockets, particularly within lending, so a targeted policy response that begins with supporting banks makes sense.
"This is the start of something more concerted from the government," said Hong Hao, a global equity strategist at China International Capital Corp. "Somebody had to pull the trigger at some point. But it is very difficult to say when the central bank will loosen monetary policy."
The initial share purchases by a unit of China's sovereign wealth fund on Monday were relatively small, according to two of the banks that received investment.
The message to the market was clear - the government is prepared to support the banks in times of trouble. That in turn sends an important signal for the broader economy that China will ensure lending does not dry up.
"It also shows that China's government is behind the banks and believes in the banks," said Mike Werner, an analyst with Sanford Bernstein. "They would not be doing this if, for instance, they were concerned about these banks having to raise capital in the near future on an industry-wide basis."
Bank stocks have taken a pounding this year as investors worried that China's cooling property market would expose overextended developers as well as local governments that pledged land as collateral for loans, driving up defaults.
China has been down this road before. Just days after the Lehman Brothers bankruptcy in September 2008, the same arm of the wealth fund bought shares in the big four banks, according to media reports at the time.
That proved to be the opening salvo in an aggressive easing campaign that included more than two full percentage points in interest rate cuts and almost US$600 billion in stimulus spending.
It looks highly unlikely that China will follow the 2008 script to the letter. The economic conditions are markedly different, but the general pattern of market intervention followed by broader policy moves may hold true.
Unless economic conditions deteriorate, China may opt for smaller, intermediate steps before cutting rates, such as aiming to ease strains in small-business lending.
China has reason to be wary of flooding the economy with easy money as it did during the financial crisis. Some of that money found its way into questionable projects that may lead to a worrisome spike in loan defaults. That post-Lehman easing cycle was swift. The last rate cut came in December 2008, just three months after the panic began. By October last year, the People's Bank of China was tightening again.
After five interest rate rises and 12 increases in banks' reserve requirements, there are some signs credit conditions have become too tight, especially for smaller companies that cannot borrow as readily from state-owned banks.
Last week, Premier Wen Jiabao urged banks to tolerate a higher level of bad debt from small and medium-sized companies.
He also dropped a strong hint that the tightening cycle could be over, saying the government had "tentatively contained" rapidly rising prices.
It will probably be a slow process. Before China reaches for a blunt instrument such as interest rates, it may first unwind some of the tightening measures put in place over the past few months to try to prevent lending from getting out of hand.
Options might include suspending initial public offerings, as it did in 2008; easing up on so-called "punitive bills" that banks are sometimes required to buy as a means of restricting the flow of credit; or injecting a bit more money into the economy through regular open-market operations.
This is not 2008. China's economic growth looks far more sturdy than it did after the financial crisis struck. But there are a few air pockets, particularly within lending, so a targeted policy response that begins with supporting banks makes sense.
"This is the start of something more concerted from the government," said Hong Hao, a global equity strategist at China International Capital Corp. "Somebody had to pull the trigger at some point. But it is very difficult to say when the central bank will loosen monetary policy."
The initial share purchases by a unit of China's sovereign wealth fund on Monday were relatively small, according to two of the banks that received investment.
The message to the market was clear - the government is prepared to support the banks in times of trouble. That in turn sends an important signal for the broader economy that China will ensure lending does not dry up.
"It also shows that China's government is behind the banks and believes in the banks," said Mike Werner, an analyst with Sanford Bernstein. "They would not be doing this if, for instance, they were concerned about these banks having to raise capital in the near future on an industry-wide basis."
Bank stocks have taken a pounding this year as investors worried that China's cooling property market would expose overextended developers as well as local governments that pledged land as collateral for loans, driving up defaults.
China has been down this road before. Just days after the Lehman Brothers bankruptcy in September 2008, the same arm of the wealth fund bought shares in the big four banks, according to media reports at the time.
That proved to be the opening salvo in an aggressive easing campaign that included more than two full percentage points in interest rate cuts and almost US$600 billion in stimulus spending.
It looks highly unlikely that China will follow the 2008 script to the letter. The economic conditions are markedly different, but the general pattern of market intervention followed by broader policy moves may hold true.
Unless economic conditions deteriorate, China may opt for smaller, intermediate steps before cutting rates, such as aiming to ease strains in small-business lending.
China has reason to be wary of flooding the economy with easy money as it did during the financial crisis. Some of that money found its way into questionable projects that may lead to a worrisome spike in loan defaults. That post-Lehman easing cycle was swift. The last rate cut came in December 2008, just three months after the panic began. By October last year, the People's Bank of China was tightening again.
After five interest rate rises and 12 increases in banks' reserve requirements, there are some signs credit conditions have become too tight, especially for smaller companies that cannot borrow as readily from state-owned banks.
Last week, Premier Wen Jiabao urged banks to tolerate a higher level of bad debt from small and medium-sized companies.
He also dropped a strong hint that the tightening cycle could be over, saying the government had "tentatively contained" rapidly rising prices.
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