China has taken steps to loosen monetary policy to fight against the slowdown in the housing market and the wider economy. So far, the turnaround in the Chinese property market has been even more rapid than that experienced by the US in the run-up to the global financial crisis and the Chinese authorities have responded sooner than their American counterparts.
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A series of monetary easing measures have been announced over the past ten days. First China cut its benchmark deposit and lending rates for the first time since 2012. Then, last week, the PBOC cut its interest rate paid on 14-day repurchase agreements by 20 basis points compared to the previous week’s auction. And on Thursday it conducted no open-market operations, for the first time since July, further loosening monetary policy. Taken in their own right, these measures will only have a marginal impact. For example, the lending rate is not compulsory for banks and the cut in the deposit rate was accompanied with an increase in the amount of margin that banks were allowed when setting rates. However, the PBoC’s monetary taps have been opened. This is likely to be a sign of things to come as the Chinese authorities – as we expected – have failed to focus on resolving long-term structural imbalances and instead chosen to try and stimulate short-term growth.
The turnaround in China’s property market so far has been even more rapid than that witnessed in the US during the mid-to-late 2000s. Chinese policy makers have loosened earlier than the Federal Reserve did prior to the Lehman Brothers collapse. However, what the PBoC intends and what it achieves could turn out to be different: it certainly was for the Fed. For example, despite substantial relaxation of the terms available on mortgages used to purchase second and third homes, mortgage loan demand fell 4.3% between January to October this year, compared to the same period in 2013. The PBoC may be pushing on a string.
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