BREAKING: China delivers a record interest rate cut!
But here is why it is NOT going to work to revive the Chinese economy.
The chart below shows the 5-year Chinese Loan Prime Rate: this is the reference rate used in China for mortgages, and so the idea was to reduce mortgage and household borrowing costs for Chinese people.
As other policy decisions aren’t working to revive the Chinese property sector, authorities now hope that cutting mortgage costs will do the trick.
But the experience of another Asian country in the 1990s shows that’s very unlikely to be the case.
In my opinion, China is starting to experience a balance sheet recession: that’s a toxic economic loop where after being burnt by deleveraging and lower asset prices households and corporates refuses to take in new credit and focus on just repaying their debt and shrinking balance sheets.
And the 1990s in Japan show us you CANNOT fix a balance sheet recession simply by lowering interest rates!
In the early 1990s the Japanese real estate bubble burst and the world’s most famous balance sheet recession unfolded – the BoJ lowered and kept rates to 0% for decades after and…nothing happened.
When you hit corporates and consumers’ balance sheets hard through a deleveraging process, asking them to take on…more credit isn’t going to work even if interest rates are low.
The PBoC can cut rates further but that’s not going to do much.
The best chance to stop a further Chinese balance sheet recession is through targeted fiscal stimulus.
If China doesn’t get it right, it’s going to continue to get worse before it gets better…