What is the problem of problems for China
Maybe no one would have noticed the emergence of a November 24 article “China should prepare for zero interest rates,” if she was not placed in the newspaper Global Times , the official mouthpiece of the Communist party on issues of international politics. It is easy to assume that the article is an expression of the perspective of the Chinese party-state leadership on issues of monetary policy.
In party and government margins among Chinese experts talk about the threat of the coming economic and financial crisis go a long time. The causes of the threats diverse, growing tensions in economic and trade relations between China and the United States, the slippage of the project “One belt, one road”, the loss of competitiveness of the Chinese economy due to the rise of labor cost in the country, the refusal of the United States and other countries-WTO members to grant China the status of “market economy” identified the trend towards population decline, “Hong Kong factor”, etc.
However, the problem of problems for China today has become unacceptably high level of debt of all sectors of the economy. Mid-year, as noted in the article in the Global Times, the total national debt of China, including liabilities of the corporate sector, the household sector and the government sector, have achieved 306% of GDP. Only one (second) quarter of this year, the growth rate was 2 percentage points (304%). But 10 years ago it was equal to 200%, 20 years ago it was 130% of GDP. For two decades, China managed to catch up in terms of the relative level of national debt of the United States and the Eurozone countries and even became slightly surpass them.
When discussing the problems of growing debt in the world economy China is sometimes in the shadows, as most often used measure of government debt. China, according to the IMF, the level of public debt relative to GDP is at the moment of 54.44% of GDP, which is quite modest compared to other leading world economies (the US – 106,2; Japan – 234,18% of GDP). However, when accounting for other economic sectors (corporate and household) China is in the leading group.
A huge debt is becoming more difficult to maintain. The duty of living his life, his relationship with the real economy weakens. Investments in fixed assets and working capital by borrowing, did not provide GDP growth rate to the extent necessary to service the debt. The effectiveness of borrowing in the Chinese economy has been steadily falling, it has fallen below one, that is, increase the debt of 1 yuan gives a GDP growth of less than 1 yuan.
In the mentioned article provides the following figures: in 2007 the total debt in China increased by 25 trillion. dollars., in GDP was only 7.6 trillion. It turns out that for 1 dollar of the debt accounted for 30 cents of GDP growth. Debtors cannot cope with debt servicing. So you have to take new loans to service old ones. Is building up the debt pyramid, the process is relentless.
If you compare China with the United States, the Euro area, Japan, we can see that China is servicing the debt requires a much higher cost. In China interest rates on loans are higher. And higher they for the reason that the people’s Bank of China key interest rate higher than the fed, ECB, Bank of Japan.
The U.S. Federal reserve had a key interest rate, were in the range 0.00 to 0.25% during 2008-2015 and Then there were several increases in rates, it reached maximum values in December 2018 (2,25-2,50%), and in the second half of 2019 happened consistently three reduction (1 Aug, 18 Sep, 31 Oct). Today it is in the range of 1.50-1.75 percent. The ECB’s key rate is at zero from March 16 2016.
The most pronounced attraction to low interest rates from the Bank of Japan lowered its key rate to zero in February 1999 and kept at this level until August 2000. The second time decline to zero occurred in March 2001, and this zero rate was kept until July 2006, almost five and a half years. And in January 2016, the Bank of Japan lowered the rate to minus 0.10 percent and is now holding at this point minus 0.10 percent.
In the negative zone took another two of the Central Bank: the Swiss national Bank (down 0.75 percent) and Bank of Sweden (0,25%). The national Bank of Denmark with Jan 2015 also holds key rate at almost zero (0.05 percent).
And now look at the people’s Bank of China. He has multiple interest rates for different types of credit operations. To compare NBK with other Central banks generally used to indicate the basic rate on loans to Prime borrowers – LPR (loan prime rate). It is noteworthy that even during the financial crisis of 2007-2009, the NSC is not very much reduced rate LPR. In 2007-2008, she was a little above 7 percent. Since the end of 2008, she gently declined and by October 2015 frozen on the strap of 4.35%. Nearly four years she was on the same level. The impression was that the Chinese Central Bank had forgotten about this tool of monetary policy. But unexpectedly, on 20 August this year, the NBK has cut rates by 10 basis points to 4.25%. September 20 and November 20, there have been two decrease by 5 basis points. Thus, today the NSC is the key rate of 4.15%.
Of course, she looks still very impressive. And not only on the background of key interest rates, the fed, ECB, Bank of Japan, Swiss National Bank, Riksbank and the National Bank of Denmark. The Central banks of England, Canada, Australia, the key rate today, are, respectively, 0.75 mm; 1,75; 0,75%.
But against the background of key interest rates of Central banks of many developing countries NBK looks like a Central Bank with a very loose monetary policy. So, the Central Bank of Turkey to date is equal to the key rate of 14.00%; the Bank of Mexico, 7,50%. In the group of BRICS countries, China has the lowest key interest rate. The other members of the group in the key rate to date, have the following meanings: India – 5,15; Brazil – 5,00; South Africa – 6,50; RF – 6,50.
It is noteworthy that the U.S. Federal reserve, ECB, other Central banks of the countries of “Golden billion” virtually abandoned attempts to return to those interest rates that were before the crisis, 2007-2009 a Short time they tried to tighten monetary policy by raising key interest rates and reduce money issue (“quantitative tightening”). Immediately emerged signs of a crisis that has forced these Central banks to get back on the rails of previous soft policy. Trump even required the fed to set a zero, and even better a negative key interest rate. Zero rate Trump needed in the first place not even to revive the fading American economy, and in order to minimize the budgetary costs of public debt service (interest rates Treasury bonds directly depend on the key rate of the fed).
Observers in Europe believe that the new President of the ECB, Christine Lagarde could make the decision to move from zero to the negative key rate. The Bank of Japan at least not going in the short term to abandon negative rates.
The epidemic of low, zero and negative interest rates swept the Central banks of the countries of “Golden billion” and think, caught people’s Bank of China. In recent months, three consecutive interest rate cut by the LPR, according to some experts, only the beginning. This course of the Chinese Central Bank for a long time and seriously that article from Global Times confirms.Valentin Katasonov