Clogged Credit Channel Requires More PBOC Easing
By Ye Xie, Bloomberg Markets Live commentator and analyst
Three things we learned last week:
1. More Chinese policy easing is needed. Despite recent interest-rate cuts, the credit spreads of lower-rated onshore bonds remain elevated. Yields on five-year bonds rated A+, the equivalent of junk debt, rose 7 basis points to 8.87% since a month ago, when the benchmark five-year loan prime rate was lowered. In fact, their borrowing costs relative to AAA-rated companies are close to a record high.
To economists at Goldman Sachs, the effectiveness of China’s monetary policy has weakened because Beijing’s housing curbs and strict Covid policy have substantially constrained credit demand from the property and consumption sectors. The clogged credit channel suggests monetary policy may have to be eased more to achieve the same growth target as before, the economists said. PBOC Governor Yi Gang pledged last week to maintain supportive monetary policy to help the economy return to its potential growth rate.
2. The housing market remains weak. New home sales at the top 100 developers slumped 41% from a year earlier in January and the weakness lingered after the Lunar New Year holiday, according to Nomura. To spur demand, banks in several cities have cut mortgage down payments for some homebuyers, according to media reports. Nomura’s economists including Ting Lu were skeptical that such easing measures will be replicated in higher-tier cities.
3. The offshore yuan touched the strongest since 2018. Friday’s settlement data showed still-hefty money inflows to China in January. So far, the authorities have tolerated the yuan’s strength.
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