Looks like China is still in ‘inflation fighting’ mode as state lending over there is functionally like federal deficit spending here.

As previously discussed, while China may successfully engineer a soft landing in their fight against inflation, I’ve never seen anything but hard landings elsewhere when fighting inflation. And with China a ‘first half/second half’ story, a weak first half generally means an even weaker second half.

China says January lending down 28% from year ago

February 12 (AFP) — Chinese bank lending fell 28 percent in January from a year earlier, official data showed, suggesting Beijing is reluctant to open the credit valves too quickly for fear of reigniting inflation.

State-owned lenders issued 738.1 billion yuan ($117.26 billion) in new loans in January, down 288.2 billion yuan from the same month last year and well short of analyst forecasts for one trillion yuan, the central bank said Friday.

Banks handed out 640.5 billion yuan in loans in December.

Chinese banks typically ramp up lending at the beginning of the year to avoid losing quotas issued by regulators and the effects of changes in monetary policy. Analysts said the weaker-than-expected data partly reflected the earlier than usual Chinese Lunar New Year holiday, which fell in January, and the government’s still tight restrictions on credit.

Mark Williams, an economist at Capital Economics in London, said it was the lowest December to January increase since 2007.

“It is hard to escape the feeling that the weakness of lending was at least partly a reflection of the slow pace at which policy is being eased,” he said.

Late last year the central bank eased lending restrictions on banks and analysts expect similar moves this year as authorities try to spur economic activity and prevent a collapse in the property market.

But most experts had forecast another easing of bank reserve requirements before the week-long Lunar New Holiday and the government’s failure to act suggests it does not expect a sharp slowdown in economic growth.

There is growing evidence that the world’s second largest economy is slowing as turmoil in eurozone countries and weakness in the United States hurts demand for Chinese exports, a key driver of the Asian giant.

The International Monetary Fund this week warned that an escalation of Europe’s fiscal woes could slash China’s economic growth by half this year, and it urged Beijing to prepare stimulus measures in response.

But Chinese leaders, worried about reigniting politically sensitive inflation, have signalled their intention to move cautiously and fine-tune policy as needed.

18 Responses

  1. Warren, this is off topic, but a burning question if you have time!

    You posted a couple weeks ago that “bank’s aren’t allowed to take what’s called ‘interest rate risk’ by borrowing short and lending long.”

    I am confused because does this not violate the MMT insight that banks make loans and then acquire reserves to meet reserve requirements? Presumably the average duration of bank loans are much much longer than the overnight rate at which they borrow reserves. This doesn’t violate the S in CAMELS? If it does, is this not a case for banks needing to acquire deposits to make loans such that they aren’t borrowing reserves to meet RR?


    1. @wh10,

      ““bank’s aren’t allowed to take what’s called ‘interest rate risk’ by borrowing short and lending long.””

      Warren was a bit exaggerating 🙂 Surely banks do it even if they do not want to do it. Just look at the volume of demand deposits in the banking system. And regulators do allow it. Yes, they try to limit it or they think they do but nevertheless allow it. And surely banks try to arbitrage this regulation like they do with any other regulation. As there is little other income for banks but net interest income part of which is maturity transformation. How large this part is depends on many factors including business model.

      1. @Sergei,

        Yeah but I really need clarity on this from the MMTers because this seems huge to me. It doesn’t seem like it can just be a matter of ‘they do it a bit.’ According to MMTers, this seems to be the way banks ALWAYS make loans. Lend long and then get overnight reserves later. If banks are cautious, even just a bit, due to CAMELS, then it would seem a very significant portion of lending needs to be financed from acquiring reserves through deposits rather than borrowing short-term…

      2. @wh10,

        Hmm good point. I’m sure there is an explanation. Perhaps the CAMELS regulations allow for this sort of activity given that this is the reality of how banks finance loans, but anything significantly beyond that gets into trouble territory.

    2. couple of things

      bank loans create equal bank deposits

      but when a bank makes a loan that creates an equal deposit it may lose that deposit to another bank, and be left with an over draft in its fed account that under current rules it needs to ‘cover’ one way or another.

      and while a bank might make a 5 year fixed rate loan, for example, and create an overnight demand deposit,
      the bank can ‘pay up’ for a 5 year fixed rate deposit to the point where that many overnight depositors opt for a 5 year deposit instead.

      also, required reserves at the fed are bank assets, not liabilities as some confuse.

  2. Warren – surely net lending by local govt represents the govt running a financial surplus vis-a-vis the non-govt sector; it sounds like the opposite to deficit spending. How are they functionally equivalent?

    Should one focus on the subsidy implicit in loans which are underpriced for the risk?

    1. when a state bank makes a loan with no concern about repayment, and happy to roll it over forever, it’s functionally a lot like simple deficit spending.

      when any agent makes a loan it’s ‘deficit spending’ as defined by spending more than income.

      1. @WARREN MOSLER,

        Hooray! The deficit terrorists SURRENDER! Mark up the SCORE for mosler’s MMT Team at the bowling alley!


        Because as the WSJ reports when it comes to the latest payroll tax extension we find something quite stunning: “House Republican leaders said Monday they would introduce a bill extending the payroll-tax break for the rest of the year without finding spending cuts to offset the program’s cost. The proposal marks a major shift for Republicans, who previously had insisted that the costs of extending a trio of provisions expiring at the end of the month be offset with spending cuts.”

      2. @Save America,

        maybe because Geithner is insisting on at least SOME tax increases; that’s something the GOP can safely oppose, hoping their party members won’t be confused by the variance involved in opposing whatever the Dems do;

        also, they may have decided the economy will worsen regardless of anything the Dems have proposed, so that it’s safe to let them take all the blame for whatever happens

  3. Well Post-Keynesians, endogenous money people, circuitistes, whomever. I just want to square the ‘lend then borrow overnight reserves’ away with this regulatory reality. Perhaps banks don’t follow it as you say. Or perhaps we’re talking about a more significant degree of maturity transformation.

    1. @wh10,

      Yes, banks do maturity transformation which is a money-multiplier speak for interest rate risk.

      Yes, individual banks are limited in how much interest rate risk they can have on their books. Basel2 says that this risk shall not exceed 20% of equity.

      Yes, banks tend to arbitrage, intentionally but more out of stupidity, this regulation.

      Yes, regulators are even more stupid to understand and enforce own rules. Worse, some regulators intentionally give away a (capital) subsidy to banks with regards to this risk.

      And yes, there are perfectly legal ways to “massage” maturity transformation within the banking system. If the banking system is at the 20% limit, it does not mean that all individual banks are. Fallacy of composition in reverse so to speak.

      And finally, no, “lend and then borrow” is a bit of an oversimplification. Bank lending and bank balance sheet is a bit more complex beast than “lend and then borrow”. But this oversimplification is in principle correct. It is important to remember that “lending” and “then borrowing” are independent bank activities with the latter coming from needs to settle client transactions which is generally as far away from lending as it can be. Those guys really do not talk to each other 🙂

      1. @Sergei,

        Sergei, thanks. Is the proper way to think of this sort of in the way one might think about capital requirements? What I mean is that in theory, without regulation, bank lending is unrestricted assuming there are creditworthy borrowers since ‘loans create deposits.’ However, once we introduce capital requirements, bank lending is then restricted. Does the introduction of ‘interest rate sensitivity’ then restrict bank lending a bit further? Can you theoretically get to a point where the bank would be able to make more loans without hitting cap requirements, but the bank would need to acquire longer term liabilities (deposits???) first so as to avoid violating interest rate regulations?

      2. @wh10,

        I think you approach the issue from a wrong position. Your position is somewhat mainstream motivated 🙂

        First, as I said above, lending and “then borrowing” are about two independent processes with any bank.

        Interest rate risk correlates with liquidity, i.e. the more maturity transformation you do the higher is your liquidity risk which absent lender of last resort is very-very real. It is somewhat fair to say that all banks apply some standard inventory management techniques to manage their liquidity. But even if you manage your inventory to the state of the art, it does not mean you will never run out of it. The whole eligible collateral discussion in eurozone by ECB is driven by (Italian) banks running out of collateral and ECB being freaking scared about payment system collapse and thus ready to bend any rules. But this is a systemic issue and that is why ECB is so much involved. For any individual bank it would have been a bankruptcy.

        And as I said above, maturity transformation is a bank speak for money multiplier model which is clearly wrong. You can and do have interest rate risk even if you have long deposits and short assets.

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