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China’s low interest rates are failing to spur lending in the economy – ‘liquidity trap’

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Eamonn Sheridan

Eamonn Sheridan

Saturday, 13/08/2022 | 05:05 GMT-0

13/08/2022 | 05:05 GMT-0

Data from China on Friday on financing. New loans slumped, even as money supply (M2 +11%) grew strongly – i.e. plenty of cash sloshing about but its not in demand:

The chief China economist at Pantheon Macroeconomics says such a combination of data is a “classic sign of a liquidity trap” .

  • “Liquidity is ample, but no one wants it.”

The remarks come via a Bloomberg piece (gated, but an ungated one can be found here):

  • The mismatch between liquidity and bank lending is also raising financial risks as market interest rates drop well below policy rates set by the central bank.
  • “Liquidity is piling up in the interbank market and there’s even a risk of money being directed out of the real economy and into markets,” said Ming Ming, chief economist at Citic Securities Co.

Risk of money being directed into markets could very well translate to a bullish input for Chinese stocks.

ps. Coming up on Monday is a maturing MLF. A majority of analysts expect the PBOC to not fully roll the amount maturing (that is, a net withdrawal of cash). On the 20th we get the monthly loan prime rate setting from the PBOC (preview here).

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