“China cuts a mortgage reference rate by most on record.”
Sounds dramatic, no? Unfortunately, the reality doesn’t quite live up to the headline.
Banks did indeed lower the five-year loan prime rate, a reference for home mortgages, on Friday. You can see it in the figure (below) if you squint.
The 15bps move was, technically, the largest reduction ever. But nuance is important.
First, China is attempting to offset the drag from a property crackdown that very nearly torpedoed the world’s second largest economy late last year. Those of you old enough to remember 2021 will fondly recall the Evergrande debacle, which could’ve been systemic. The shakeout isn’t over. Developers are still defaulting. It’s going to take more than an incremental reduction to a property-linked lending rate to stabilize the situation.
Second, Xi Jinping has made it abundantly clear that “COVID zero” isn’t up for debate. In fact, questioning the wisdom of the Party’s virus containment strategy is borderline illegal now. Unless and until that changes, analysts will question the effectiveness of easing measures.
Third, China only revamped its rates regime in August of 2019. So, it’s not clear that Friday’s move is historic in any sense. The figure (below) shows the history of both the five-year rate and it’s one-year counterpart, which became the de facto benchmark lending rate a few months after it was introduced.
Cuts are few and far between, and at least to outsiders, there’s still some ambiguity about who’s setting these rates.
Ostensibly, LPRs represent the best rates offered to customers by a handful of Chinese banks. But, the one-year, medium-term lending rate is a factor, and it’s set by the PBoC. Until recently, LPR reductions were always presaged by MLF cuts. Friday’s reduction was the second time that hasn’t been the case.
But note that the PBoC lowered the floor on mortgage rates last weekend to 20bps below the five-year LPR rate. Plainly, that presaged Friday’s five-year LPR reduction. So, this was a joint effort between policymakers and banks, and even that characterization assumes you draw a distinction between the two, not a given in China.
In any event, when taken in conjunction with the lower floor, first-time buyers are now able to borrow at 4.25%, a 35bps reduction from two weeks ago. Now we’re getting somewhere. Maybe.
Or maybe not. Because who knows, right? Who knows what the impact of a de facto 35bps mortgage rate cut for creditworthy, first-time homebuyers in China will be at a time when the country is still laboring under the threat of lockdowns.
If April’s broad credit data was any indication, demand is nonexistent (figure below).
Bank lending collapsed. The lockdowns are an economic death knell, even as they’re designed to save lives.
“For a housing recovery, the PBoC’s 20bps cut to mortgage rates was a critical move, albeit not enough,” SocGen’s Wei Yao and Michelle Lam said, of last weekend’s tweak. “The trajectory of housing sales, particularly in cities emerg[ing] from lockdowns, could be a leading indicator and thus key to watch.”
New home prices have fallen every month since August. Or, perhaps more aptly, every month since the Evergrande meltdown (figure below).
Last month’s YoY decline was the first in seven years.
April’s activity data was abysmal, and while the situation should improve in May, the jobless rate is climbing. “The April activity data probably marked the bottom [but] the pace of recovery is likely to depend on the speed of normalization in Shanghai and Beijing and how fast confidence will return to the private sector,” SocGen’s Lam went on to say. “On both points, the zero-COVID strategy could be a persistent drag.”
All of this underscores the Herculean nature of the Party’s task: Managing China through a decade-running transition from smokestack, emerging-market-command economy to consumption-oriented, pseudo-market-based developed world powerhouse.
Property, and infrastructure more generally, are levers Beijing can pull to resurrect growth. But as is the case with all Party growth levers, there are risks. Debt risks, moral hazard risks and hidden risks that don’t show up until it’s too late.
This week, Bloomberg added up the value of fiscal and monetary measures aimed at bolstering the economy in 2022. China is set to pump more than $5 trillion into support efforts. It’s possible the US economy will outperform China’s for the first time in nearly 50 years, according to a Bloomberg Economics assessment.
If you get the feeling this discussion has drifted pretty far afield — that I’m panning out too quickly — that’s precisely the point. Everything that happens in China is a microcosm and a macrocosm simultaneously.
Prof. H: do you mean “It’s possible the China economy will outperform US’s for the first time in nearly 50 years, according to a Bloomberg Economics assessment.”? Thanks for this article.
No. It means exactly what it says. Bloomberg Economics projects China’s economy growing just 2% this year. Their projection for the US economy is 2.8%.
In April, zero cars were sold in Shanghai. So how many iPhones were sold? And how is AAPL’s 2Q report going to look? AAPL is still 6-7% of SP500, plus its supply chain.
The Chinese lack of an effective Covid vaccine. To compensate, they impose lockdowns in major cities, resulting in supply chain interruptions for US goods made in China. Why do so many unoccupied properties (called ghost cities) exist in China – mere empty spaces that lack water or heat? Why was Jack Ma kidnapped by the Chinese government for a period of time and silenced? Was this most successful Chinese business leader somehow a threat to the government? Perhaps he was overly gregarious? Then, of course, the Chinese maintain an ongoing, close relationship with the murderers that govern Russia.
These matters of fact reflect questionable management and counter-productive practices in the Chinese economy by the CCP. I’m sure there are other matters of fact that can be named to further highlight mishandling by the CCP. But the Chinese government seems to feel they have enough of a grasp of capitalism so they can still exercise top-down control of their people and their economy. The examples cited above imply missteps, at best, if not misunderstanding.
In 2012, Xi Jinping came to power, taking the reins of a new, fully realized capitalist economy in a large communist country – a first in the history of the world. Since the time of Mao, China had striven for this moment. No Chinese leader before held this level of power and acceptance in the world – not Chiang Kai-shek, not Mao Zedong, nor Deng Xiaoping, nor Jiang Xiang, nor Hu Jintao. It was a massive accomplishment, completed with many years of effort and cooperation with western countries.
Today the leadership of Xi Jinping and the Chinese Communist Party (CCP) seems to be slowly but surely withdrawing and enabling failures. They put their success at risk by trying to go their own way, as with their Covid vaccine. Western countries cannot withdraw suddenly from their trading relationships with the Chinese. But Chinese actions and inactions in managing their economy can impact western trading partners and erode confidence. And in capitalism, the absence of confidence does not cut the mustard.
very well said, Chicago…here’s hoping the regressive emperor for life transitions to emperor emeritus with newer more progressive blood moving in and taking over…perhaps Putin’s massive debacle may move the needle between now and then … one can hope…
Thanks for the note, John. Please call me Dave.
Your comments point to a real possibility. I was not thinking about that, as I assumed Xi had the party in the palm of his hand. But you raise a good point. I recall there have been occasions when the CCP voted against the wishes of the leader. Though it’s possible, I doubt that will happen in this case (But I secretly hope they will toss out Xi and shake things up).
After Deng Xiaoping, who pushed to promote a more open China, the CCP voted under Jiang Zemin, and (even more so) under Hu Jintao to assert its control. Once they got into the WTO 2001, Hu took office in 2002 and the CCP mood for reform changed. It was as if they perceived there was breathing room, and they could decide to tighten the CCP grip, so to speak. Hu had to abide with it.
Here’s a link to a brief, related read: https://www.aei.org/op-eds/chinas-steps-backward-began-under-hu-jintao/
The thing is, we’re trying to do business with these people. If they continue down this path, US businesses should at least note the character of their partners and how the partnership may compromise success.
Another note: We’re overdue for joining the TPP. I’m surprised Biden has not put that forward yet.
thanks for the additional color and history, Dave … 1) definitely agree about rejoining TPP if possible, as well as
2) the new Cold War that we’ve entered into … which I believe would have been avoided had America chosen a different path in response to 9/11, but that obviously can’t be undone now…so here we are…