Politics are winning over economics

CHINA ADVISORY - Report 14 Nov 2022 by Andrew Collier

Bloomberg just published a story about significant new support for China’s property market. Measures announced thus far include asking banks to extend 1 trillion yuan in emergency support for the property market by end-2022, reducing interest rates, and, according to Bloomberg reporting, developers’ outstanding bank loans and trust borrowings due within the next six months can be extended for a year, while repayment on their bonds can also be extended or swapped through negotiations.

These financial policies are a major reversal of the government’s three red lines policy that restricted loans and forced property adjustments onto the backs of China’s local governments. Even a month before the just-ended Party Congress, there was still pressure for tightening. Under orders from local governments, local state firms, including LGFVs, had begun buying land. However, the Ministry of Finance stepped in to ban this practice because of the obvious moral hazard and debt issues.

But now Beijing is backpedaling. Beijing is returning to lax liquidity conditions to prop up the economy and stabilize support for the Party. Now, following the Party congress at which Xi Jinping solidified his power, it looks as if the warning bells from the PBOC about a property bubble are being ignored in the face of panic about unemployment, declining growth and potential unrest.

I think this bodes badly for improving credit allocation at a time when every yuan is increasingly important.

Now read on...

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