Courtesy of Also Sprach Analyst.
Now that it is clear that the Chinese economy is slowing rapidly, there is more and more evidence that the Chinese central government has given up on the project to rebalance the economy. Even though they say real estate market curbs will continue, and that local government debts will be cleaned up, the reverse is happening in policy. They have, therefore, also unofficially given up on rebalancing the economy away from investment and towards consumption.
The China Banking Regulatory Commission (CBRC), for instance, has dropped the proposal that risk-weighting for second home mortgages be higher than the first home (via Sina). Also, various media are reporting that banks are now allowed to offer as much as 30% discount from benchmark rates for mortgages, a clear sign of saying one thing (i.e. continue to tighten real estate market) and doing another thing (easing mortgages).
Also, as we know, the government is already accelerating future investment projects, and that implies that banks will have to lend to fund said projects. In short, Chinese banks are increasingly policy driven. We have seen consistently weak loan demand in the past few months, indicating that China is probably already in some version of a liquidity trap as loan demand falls. However, new loans ended up higher than expected as the rush to lend in the final week of May took place. Notably, the final rush to lend coincided with China accelerating investment project approvals and easing mortgages.
So, on the one hand, the government wanted to stop speculation in the real estate market and to prevent infrastructure malinvestment from hobbling local governments. On the other, it seems that real estate speculation is being used to help stabilise the slowing of the economy and local governments will again borrow and invest for the sake of manufacturing GDP.
This is consistent with the thesis of Prof. Victor Shih. He argues that what Chinese elites fear most is not high inflation, but no inflation. It is massive investment projects and inflation which give these elites the chance to gain massive profits. Corrupt government officials approve massive projects, and related parties like relatives and friends (and people who have bribed them) are contracted. Because they were well-connected, they can borrow cheaply from banks even though other private entities can’t (and occasionally, they just steal the money). And when they build the stuff, they use every possible ways to cut corners in order to maximise profit. High inflation allows these people to obtain even greater wealth by putting money into real estate investment. Massive debt in the economy isn’t the biggest concern so as long as they have the ability to inflate the economy again. It will only become a problem when they have lost that ability.
From the macroeconomic perspective, this is a choice between maintaining high overall economic growth at the expense of households’ consumption and rebalancing the economy at the expense of corrupt officials and elites. Sadly, those who run the government are choosing the latter.