China PBOC Asks Banks to Refrain From Lending Too Much

Jan. 13 (Bloomberg) — The People’s Bank of China’s regional branches asked banks to refrain from lending “too much” in early part of the year, Reuters reports today, citing unidentified people in the banking industry.

Shanghai PBOC branch told banks that 1Q new loans shouldn’t exceed 40% of total new loans last year, according to Reuters

31 Responses

  1. Seems like a front-loaded question! 🙂

    How will they know if it backfires? Back-loaded results?

    Who decides the settlement terms, and when? Does the CCCP have a Heisencomrade Unsettling principle, and can anyone else decipher it?

  2. I read a paper last year showing how China changed reserve requirements to lower credit/debt creation.

    It basically showed that exogenous PBC rules don’t work and banking is endogenous.

    http://www.apeaweb.org/confer/hk10/papers/cao_yong.pdf

    “Having examined the determinants of money multiplier and money base, this study shows that the changes of money multiplier and money base have been largely determined by the changes of k-ratio, excess reserves in the commercial banks and foreign exchange reserve. As these variables are market-driven and beyond the control from the PBC, the money supply in China has been largely endogenous. The Chinese monetary authority, the PBC, has tried to use conventional instruments such as to increase reserve requirement ratio and unconventional instruments such as to issue PBC bill and note in the effort in containing the growth of money supply. But these PBC’s efforts could only have played a marginal role. Ultimately, it is those market-driven variables which have played the deterministic role in pushing the aggressive money supply growth in China”

    1. @Adam2,

      Which is why I support full reserve banking. Under full reserve, commercial banks just aren’t allowed to create money / credit. The money supply is determined solely by the central bank. At least that’s the theory. No doubt there would be problems enforcing the rules, but my hunch is that full reserve is better than fractional reserve. See:

      http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf

      Note that in the above paper, the authors also advocate the MMT idea that in a recession, the government / central bank machine should just create money and spend it into the economy (and/or cut taxes).

      1. @Ralph Musgrave,

        Full reserve is just changing the label on the tin. I’ve no more faith in the central bank getting the money supply right than the private banks.

        Centralised structures are very brittle. And the authorities have shown no desire to shut down insolvent banks, never mind illiquid ones.

      2. @Neil Wilson,

        Re “no more faith in” central banks than the unregulated free market, economic instabilities seem to have moderated since central banks and governments started to try and moderate the instabilities. See:

        http://ralphanomics.blogspot.com/2011/08/economic-fluctuations-since-1870_26.html

        And that’s despite the numerous blunders by central banks since 1930 or so. It’s an extremely slow learning curve, but with a bit of effort I just think things can be improved still further.

        Re the authorities showing no desire to close down insolvent banks, there was Lehmans. But you’ve got a point. The reality may well be that there is a choice between two evils here. Let the criminals, fraudsters and psychopaths of Wall St run the show. Or have so called “government” (which is controlled by the aforesaid psychopaths) run the show.

        I just like pushing for the ideal world, which I think consists of having the central bank control the money supply. And it consists of NOT having the criminals and fraudsters (the 1%) rob the 99%.

        I also fully take the point that a well regulated fractional reserve system is as good as any. So it’s a question of “what’s the easiest way to regulate that brings the best system”. My hunch is full reserve, but I’m not 100% confident.

      3. Ralph,

        Good points well made.

        I wonder however if a distributed money distribution system could be put in place that would be more responsive yet still operate safely.

        But to work that out requires a decent simulation model so that we can jiggle the parameters.

      4. @Ralph Musgrave,
        But then wouldn’t they be limited to play around with people’s time preferences, or would they always borrow from the Central Bank? That could be a bit of a problem.

  3. @Adam2,

    That’s why they have reverted to the older approach of manual control. When a red phone rings there, people won’t argue. Good on them that they are open-minded and do not believe in every piece of rubbish Western economists want them to believe in like the money multiplier or targeting inflation via aggregate demand by playing with the interest rates and unemployment rate. The economic system is clearly not self-adjusting at the macro level.

    The critical problem in China is enforcing the will of the central authority over the regions – rather not an unexpected issue in a nation of 1.3 billion undergoing dramatic changes and rapid growth. But banks are mostly state-owned so ultimately they can be used as a part of the transmission mechanism. The banks must not make decisions based solely on their self-interest (profit maximisation) as they are in fact social utility institutions. This is the coded meaning of the message from PBC – financing real estate speculation must be constrained.

    There was a chance to effectively nationalise the banking system and finance industry in the US in 2008 by allowing it to fail completely, wipe off the shareholders equity and inject public funds instead. This chance was wasted by saving Wall Street at the Main Street expense – instead of saving the patient by removing the tumour, the cancerous tumour was cured but the patient is still sick, very sick. The possible anointment of Mitt Romney could be a highly symbolic act. A typical post-industrial pest and parasite, a financial capitalist who made money not by making real products but by destroying the productive capacities of the American industry has every chance to be elected in 2012. Anyone who accuses Chinese Communist Party of corruption and abuse of power should first examine the institutionalised corruption hidden in the spotlight due to extensive brainwashing which forms the basis of the American oligarchic “democracy”. Anyone who asks for the separation of powers in China should first ask for the separation of capital and executive and legislative power in the US.

    To me there is nothing wrong with the private ownership (or rather “custody”) of the means of production in China or in the US but there is also nothing wrong with the public ownership and centralised control of the finance sector which in fact is a public utility like the army or the Police.

    1. @Adam (ak),

      The problem is that the control does not end there. The whole corporate bond market in China is priced according to policy objectives with state-owned banks owning the majority of it. China’s banking system is incompatible with their Western peers. If the Big 4 Chinese banks prices their assets properly, they would all have negative equity. The regulators don’t really care as long as they follow the party line.

      In China, the communist party controls everything of significance to the economy.

      1. @Zaid,

        Yes you are perfectly right and I am not glorifying the post-Communist system I just wanted to say that what they have is working quite well.

        Now what’s the point of having correctly prices assets or the banking system compatible with the West if the productive economy delivers? Look I am not an economist I am an engineer. The Chinese simply have a hidden money printing and subsidy scheme. Now this is I believe an element of camouflage otherwise the West would keep attacking them from the neoliberal positions. Just look at Hungary and the fight for the independence of the Central Bank there. Yes I know that Viktor Orban is a nationalist resurrecting fascism but he should be attacked for that not for violating the separation of economic powers (Central Bank and Treasury). On top of this is it the Chinese system corrupt? Yes it is very corrupt but so what?

        Now here comes a short story about red venture capitalism. You can extrapolate it by magnifying 100 times and you’ll get what’s going on in China I believe.

        The second company I worked for in Poland (a local telecommunication equipment vendor) was founded in mid-1980s by a guy with good connections in the provincial Polish Communist party. They took a loan at very low interests and held it through the hyperinflation period. Was everyone able to take a subsidy-loan in 1986? Take for example my family. No way my dad was even not allowed not only to run a business but to get a passport and leave all that mess (he did it in 1990). At that time everything still depended on the god will of the Secret Service or Communist Party and my dad had been an anti-communist activist in 1980-81. Did I like the red bloodsuckers? Absolutely I hated them.

        But the moral from this story is that company founded by a typical red pig (who was later jettisoned when the political winds started blowing from the opposite direction) was able to help build a high technology industry, run a profitable business, compete with Lucent, Alcatel and Ericsson and account for 7% of phone lines in the mid 1990s before the end of the golden era in telecommunication and second wave of the Westernisation in Poland. NB The company still exists but they mostly make military telecommunication equipment.

        Now look at the whole Chinese system from a purely pragmatic point of view like an engineer. You have a black (or rather red inside and painted black outside) box. You have input – raw materials, labour etc. You have output – the products and services they deliver and export. Does it work? In my opinion it works remarkably well delivering an unprecedented rate of growth to the majority of the society and it is not just a short-term phenomenon. Corruption is in fact a lubricant and the Red Party power sticks the whole thing together. Who cares about the negative equity of the banks which are state owned anyway? Who cares about low wages of the workers if these are rising and people have ways to escape poverty by working hard unlike in the US? Would negative equity mean anything to Fed? So this is how much it means to the Chinese banks. Again I am not glorifying but what’s the alternative? A neoliberal heaven and an IMF protectorate? Look at Russia this is what you would get!

        The main mistake made by the people from the “West” (including Middle Eastern tradition as well) is that they are still hypnotised by a guy called Plato. We try to understand the system in terms of ideas, axioms and universal rules not atoms, chaos and dynamic processes.

        We have been overtaken I believe. We deserve that – Plato is dead.

      2. @Adam (ak),
        Poor Greek philosophers, they are not to blame. Their ideas had little to do with the situation we are living now, even though all thinking is little more than a re-edition of either Plato or Aristotle.

        I prefer to look at the new orthodoxy in economics and tell them in their face: Keynes is dead. Dead right..

      3. @Adam (ak),

        I believe if the economics profession took a little lesson from Plato we wouldn’t be in this mess. Form over matter is only arrived at after many observations confirm the form’s existence. If the establishment economists only look at empirical evidence, they will find their theories to be garbage. Cause and effect fails to explain nonlinear systems, and Keynes was not only able to explain why the economic system is nonlinear, but he also simplified in terms of ideas and universal rules. I used to be a systems developer before joining the financial sector, so I know where you’re coming from. If China’s communist party was able to organize its economy more effectively around Keynesian ideas, it doesn’t mean that the West cannot do the same. Neoliberalism will eventually be discredited, and politics will oscillate back to greater government role. This is the way it has always worked in most of the West.

  4. The Chinese banks tend to lend too much of their quotas in the first two quarters of the year, cause inflation problems, then lend too little at the end of the year which squeezes business. Specifying quarterly quotas isn’t a bad idea.

  5. OMG, I just found Warren’s interview with Peter Schiff. Just in case, it’s available at http://mikenormaneconomics.blogspot.com/2011/11/warren-mosler-interviewed-by-peter.html

    The interview raises the EXACT same issues that have plagued me ever since I’ve stumbled upon MMT on youtube. The problem is, Schiff does not let Molser answer these very crucial questions even after they are explicitly raised! (And to add insult to injury, I’ve been at a loss to get answers here).

    I guess, after reviewing this topic yet again, I can say that the spectrum is a balanced gov budget at one end and an infinite deficit on the other. What is MMT’s outer limit on the gov deficit? I know that abstractly it’s inflation, but how is that fleshed out? It seems to me that the answer would have to start with the nature of things: the U.S. population, amount of natural resources, amount of capital goods, and the current size of government. If this has already been figured out based on the current numbers, I’d appreciate a quick overview.

    And here is the 64mil dollar question: does MMT agree/account for the fact that the size of gov (in terms of its costs to/upon the overall economy) is a variable different in nature from labor, resources, etc. (the fundamental economic “givens”)? For instance, gov has been paying its employees well in excess of the private sector (creating inflation and impoverishing the private sector in other ways) and this trend is not easily manageable under the current system…

    1. @Nick Boyd,
      For instance, gov has been paying its employees well in excess of the private sector (creating inflation and impoverishing the private sector in other ways) and this trend is not easily manageable under the current system…
      This is an issue our Government of austerity brought here. They cut the salaries of the public sector in 14% (nominal) with the excuse that it would line the public sector with the average private sector salary.
      What it neatly forgot is that the average qualification of public sector workers is much greater than the average of private sector workers (we’re talking about teachers, professors, judges, police officers, doctors vs private sector here). If the Government had taken qualification in account, it would have concluded that the public sector is being underpaid (why would someone go to judge to have to work days and nights to receive 4000/month when it could go to lawyer and gain twice as much with less work?)

    2. yes, it’s all in the literature on this website. See ‘full employment and price stability’ and ‘soft currency economics’ and the rest under ‘mandatory readings’ thanks!

  6. I’ve previously remarked that I had “issues” with what’s written in Warren’s 7 Deadly Innocent Frauds. Let me just take those piece by piece.
    WM: “when the U.S. government does what’s called “borrowing money,” all it does is move funds from checking accounts at the Fed to savings accounts (Treasury securities) at the Fed. In fact, the entire $13 trillion national debt is nothing more than the economy’s total holdings of savings accounts at the Fed.”
    NB: This cannot be the whole story. What happens to the “borrowed” money? It doesn’t just “sit” in the savings account, or there’d be no point to borrow it.
    Doesn’t Treasury have an account at the Fed too? If so, then the “borrowed money” would ALSO be credited to the T’s checking account at the Fed (quite apart from creating the savings account or GovOU). The gov would then “spend” that money, so that it’d end up in some banks’ reserve accounts. Am I wrong?

    1. @Nick Boyd,

      You’re missing the point. The Treasury Secruties are the equivalent of savings accounts for the non-government sector. When the government spends, it creates Net Financial Assets (Reserve Balances as well as Treasury Securities). When the government (Treasury/Fed) sells Treasuries to the non-government sector, it’s equivalent to moving funds from a checking account to a savings account – a reserve balance account or a Treasury security account.

      1. @Zaid,
        I am not missing the point. You just restated the quote I gave from Mosler. My point (which you are missing) is that “moving funds from a checking account to a savings account” is not the complete picture. There is no “funds” in the savings account. There is only an IOU there (a GOU). The “funds” end up in the Treasury’s checking account with the Fed, get spent, and end up in reserves. This should have been stated in the passage from 7DIF that I quoted in the opening post.

      2. @Nick Boyd,

        What you’re defining as a savings account is different than what Mosler intended. He means that a treasury security is “similar” to a savings account for the non-government sector. The funds are the treasury securities.

    2. but the point is, as it says, in fraud 1, spending is operationally independent of borrowing, and also goes into the ramifications of spending

      so to understand the fundamental dynamics look at each independently. the ‘link’ is accounting- after the fact record keeping, which is not causal.

      additionally, there are ‘self imposed constraints’ such as debt ceilings, no over draft rules, budgeting rules. etc.

      1. @WARREN MOSLER,

        The independence of spending from borrowing is one of those “neat” ideas I referenced in the 7DIF in my first post here. This is indeed a point that needs to be hammered into most politicians today.

        However, like I said before, given the principles of 7DIF, I would not arrive at even near the solutions proposed there applying the same principles.

  7. Warren what do you and others think of private placement investment programs in non-depletion accounts? Does that make you cringe right away or would you actually consider something like that?

      1. @WARREN MOSLER,

        basically a private trading and escrow/holding company that adds their name to an investor’s bank account but does not get activity rights to that account. They do this so they can use the account balance in that account to increase their escrow capabilities and maintain escrow/holding status. They are an escrow agent for banks that buy/sell securities between each other. The more accounts they have, the larger bank deals they can process through escrow. Each investor gets a monthly percentage for sharing their funds at the signatory level with this company. The investor’s risk is if the escrow company or the actual retail bank housing the account becomes insolvent or if the bank transactions go sour or change and therefore the escrow fees associated with that transaction are re-negotiated.

        The shared account would be with a large, retail bank and is non-depleting and the escrow company has no activity rights.

        Have you heard of this type of thing before? Apparently escrow and holding corporations are necessary for banks to use in order to make transactions amongst each other, so that is the service being provided here. Thoughts/opinion?

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