This week, the People’s Bank of China revealed a long-anticipated change to how commercial bank interest rates will be calculated. Revealingly, PBOC officials were at pains to stress that while the move might lower interest rates for corporate lending, mortgage interest rates wouldn’t fall.
Eighteen banks now have to show the PBOC the best interest rates they offer to their clients, based on rates set by the central bank’s medium-term lending facility, a source of credit for the banks themselves.
The change has two objectives. One is to lower rates, at least for some loans.
The other is to improve the transmission mechanism for monetary policy: The PBOC wants banks to do a better job of passing changes in policy on to their customers.
The most interesting aspect of the new approach is the deliberate exclusion of real estate. This is likely because Chinese households went on a borrowing spree after the PBOC’s 2015 round of benchmark rate cuts. In 2016, household debt rose by 6.2 trillion yuan ($878.11 billion)—compared with an increase of around 3 trillion yuan a year on average for the previous five years—and only accelerated subsequently.
Which segues nicely to another Mike Bird article.
Beijing is wisely wary of the decade-long boom in China’s housing market, the consequent build-up in borrowing and what it means for the country’s development model. But in the data there is no sign of a crackdown.
Last week, in its annual Article IV assessment of the Chinese economy, the International Monetary Fund raised its forecasts for Chinese household debt by several percentage points. The IMF expects household debt to rise to 56.2% of GDP this year, and as high as 67.9% of GDP in 2024. The latter figure would be well above current levels in Japan and the eurozone.
In the past 12 months, developers have booked a record 11.7 trillion yuan ($1.66 trillion) in pre-sales—sales of homes due to be completed in the years ahead. Assuming that buyers put down a deposit of around 30%, that is north of 8 trillion yuan in mortgage debt not yet fully on the shoulders of the household sector.
In comparison, Chinese household debt rose by 7.3 trillion yuan between the end of 2017 and the end of 2018, according to data from the Bank for International Settlements.
The government has good reasons to want to stop the buildup. Many emerging markets have struggled to regain high levels of growth after generating considerable property-related debt, particularly in Asia.
But there is no sign that household debt is even plateauing, let alone declining. Beijing’s stated preference is for an end to speculative household borrowing, but it is proving to be a difficult habit to kick.