China is trying to fight disinflation with money supply pumping

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via notayesmanseconomics:

Firstly let me wish you a happy Chinese New Year for tomorrow. It has not been the best of periods for the Chinese economy as the property crisis has rumbled on. We can look at events via this mornings monetary data.

At the end of January, the balance of broad money (M2) was 297.63 trillion yuan, a year-on-year increase of 8.7%. The balance of narrow currency (M1) was 69.42 trillion yuan, a year-on-year increase of 5.9%. The balance of currency (M0) in circulation was 12.14 trillion yuan, a year-on-year increase of 5.9%. The net cash injection in the month was 795.4 billion yuan. ( People’s Bank of China)

So we start with the view that policy here is expansionary and we have a nuance in that broad money growth is faster than narrow money. So any boost to nominal demand is likely to come later. Another way of looking at this is below.

At the end of January, the balance of domestic and foreign currency loans was 247.25 trillion yuan, a year-on-year increase of 10%. The balance of RMB loans at the end of the month was 242.5 trillion yuan, a year-on-year increase of 10.4%.

RMB loans increased by 4.92 trillion yuan in January, an increase of 16.2 billion yuan year-on-year.  ( PBOC)

The rise in bank loans was what pulled broad money growth higher and gave a pattern different to what is often seen in the West where narrow money leads usually. However narrow money growth is also picking up.

Disinflation

We can compare the boost to nominal demand above with broad  money growth at 8.7% with this from yesterday.

In January , affected by the holiday effect, residents’ consumption demand continued to increase, and the national CPI rose by 0.3% month-on-month, rising for two consecutive months; affected by the higher comparison base of the Spring Festival in the same month of the previous year, it fell by 0.8% year-on-year .

In annual terms we have disinflation with prices lower than this time last year. Many western countries would love that. But if we stay with simple monetary analysis we see that the money supply growth seems to be impacting the monthly growth numbers, something that the Chinese authorities are keen to point out.

  1. CPI has increased month-on-month for two consecutive months

We have often looked at pork prices in the past due to its importance in the Chinese diet but presently they are quiet.

The supply was relatively sufficient, and the prices of eggs, edible oil, fresh fruits and pork fell  by 1.7% 1.0% 0.5% and 0.2% respectively.

So we can move on after noting that again we in the west would like that situation after the food price inflation we have seen.

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The news created some excitement at the Financial Times.

China’s prices fall at fastest rate in 15 years as economy battles deflation

Analysts warn prolonged price declines will undermine business and consumer confidence.

The FT really dislikes lower prices and in its excitement seems to be overlooking the monthly growth. Plus many would like lower food prices as look at the annual numbers.

Among them, food prices fell by 5.9% , affecting the CPI to fall by about 1.13 percentage points. Among foods, the prices of pork, fresh vegetables and fresh fruits dropped by 17.3% 12.7% and 9.1% respectively, which together affected the CPI to fall by about 0.78 percentage points, accounting for more than 90% of the year-on-year CPI decline. ( China NBS)

Let us move on having noted that in response to the annual disinflation China has strong monetary growth and bank loans.

Interest-Rates

The Chinese are being encouraged to spend via lower interest-rates on their savings.

(Yicai) Feb. 8 — A number of Chinese lenders, including Shengjing Bank and Xiamen International Bank, have lowered their deposit interest rates for the first time this year.

Shengjing Bank today will cut its interest rate on three-year and five-year deposits, which is now 3.2 percent, an account manager at the Chinese commercial bank told Yicai.

So we have money supply growth and lower interest-rates in response to the consequences of the property crisis we have been following.

Residents’ demand to save money has increased, while their consumption willingness has decreased amid a lack of confidence in their expected income and market conditions.

This is a more complex issue that it looks as conventional economic theory suggests higher consumption in response to lower interest-rates. But my opinion is that it is more complex than that as sometimes people increase their rate of saving if they feel worried and nervous.

Property Crisis

Speaking of feeling worried and nervous the drumbeat here continues.

Chinese investors and their creditors are putting up “For Sale” signs on real estate holdings across the globe as the need to raise cash amid a deepening property crisis at home trumps the risks of offloading into a falling market.  ( Bloomberg )

There is a piece of irony here in that this phase has to some extent been created in the west via the interest-rate rises and the effect on commercial property. For Chinese property companies it is an example of what Shakespeare was talking about here.

“When sorrows come, they come not single spies, but in battalions” ( Hamlet)

The plan to help the domestic market via foreign sales has collided with this.

A unit of Guangzhou-based China Aoyuan Group Ltd., for example, which is in the middle of a $6 billion debt restructuring plan, sold a plot in Toronto atabout a 45% discount to the 2021 purchase price late last year, according to data provider Altus Group. ( Bloomberg)

In fact there is an impact just up the road from me as well.

Just this week, distressed developer Guangzhou R&F Properties Co. agreed to sell its stake in a £1.34 billion ($1.69 billion) property project in London’s Nine Elms district in return for some of its dollar bonds and 10 pence, while an office block in Canary Wharf is selling for 60% less than it sold for in 2017 after it was seized by lenders from a Chinese investor.

I stopped for a look last week and work appears to be nearing completion now, so who will it be rented/sold to and what is the demand? What we do know is that Chinese developers want this.

Money talks, mmm, mmm, money talks
Dirty cash I want you, dirty cash I need you, oho
Money talks, money talks
Dirty cash I want you, dirty cash I need you, oho ( The Adventures of Stevie V )

The problems at home are highlighted by this development.

What’s new: Shenzhen, one of China’s most expensive megacities, relaxed housing restrictions to allow more people to buy a home in the city, in the latest effort by a local government to bolster the ailing property market.

The city government issued a notice on Wednesday stating that residents with local household registration, or hukou, will no longer be required to pay personal income taxes and social insurance for three consecutive years to buy a home. Additionally, the city reduced tax and social insurance payment requirements for migrant workers to be eligible for home purchase from five years to three years. ( Caixin Global)

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The Chinese will not thank me for this but their situation has a lot of similarities with Japan in 1990 as it experienced the beginning of its balance sheet recession which became called The Lost Decade. This week has seen another feature of this as the Chinese plunge protection team has been deployed to stop the falls in the equity market.

#China‘s top securities regulator #CSRC to further tighten regulation on short selling, suspends some securities lending. ( @YuanTalks)

There is a particular irony today as the Japanese Nikkei 225 went above 34,000 for the first time for over 30 years. Maybe China simply needs to follow the example of The Tokyo Whale.

But essentially we are seeing the balance sheet recession grind on with implications for the rest of the world.

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