Why China poses the next great risk for a deflationary world. China is trapped. The Communist authorities have discovered, like the Japanese in the early 1990s and the US in the inter-war years, that they cannot deflate a credit bubble safely.
A year of tight money from the People’s Bank and a $250-billion crackdown on shadow banking have together pushed the Chinese economy close to a debt-deflation crisis.
The surprise cut in the Reserve Requirement Ratio — the main policy tool — comes in the nick of time. Factory gate deflation has reached 3.3%. The official gauge of manufacturing fell below the “boom-bust†line to 49.8 in January.
Haibin Zhu from JP Morgan says the 50 point cut in the RRR cut from 20% to 19.5% injects roughly $100-billion into the system.
This will not itself change anything. The average one-year borrowing cost for Chinese companies has risen from zero to 5% in real terms over the last three years as a result of falling inflation. UBS said the debt-servicing burden for these firms has doubled from 7.5% to 15% of GDP.
Yet the cut marks an inflexion point. There will undoubtedly be a long series of cuts before China sweats out its hangover from a $26 trillion credit boom. Debt has risen from 100% to 250% of GDP in eight years. By comparison, Japan’s credit growth in the cycle preceding its Lost Decade was 50% of GDP.
The People’s Bank may have to cut all the way to zero in the end — a $4 trillion reserve of emergency oxygen — but to do that is to play the last card.
This is worrisome! We have a shut show here if they start to crumble do we escalate.
Will this effect homes, land etc.
A year of tight money from the People’s Bank and a $250-billion crackdown on shadow banking have together pushed the Chinese economy close to a debt-deflation crisis.
The surprise cut in the Reserve Requirement Ratio — the main policy tool — comes in the nick of time. Factory gate deflation has reached 3.3%. The official gauge of manufacturing fell below the “boom-bust†line to 49.8 in January.
Haibin Zhu from JP Morgan says the 50 point cut in the RRR cut from 20% to 19.5% injects roughly $100-billion into the system.
This will not itself change anything. The average one-year borrowing cost for Chinese companies has risen from zero to 5% in real terms over the last three years as a result of falling inflation. UBS said the debt-servicing burden for these firms has doubled from 7.5% to 15% of GDP.
Yet the cut marks an inflexion point. There will undoubtedly be a long series of cuts before China sweats out its hangover from a $26 trillion credit boom. Debt has risen from 100% to 250% of GDP in eight years. By comparison, Japan’s credit growth in the cycle preceding its Lost Decade was 50% of GDP.
The People’s Bank may have to cut all the way to zero in the end — a $4 trillion reserve of emergency oxygen — but to do that is to play the last card.
This is worrisome! We have a shut show here if they start to crumble do we escalate.
Will this effect homes, land etc.
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