Today we need to look East again as the main economic news has come from China and it feeds straight into our main economic theme for it. Yet again we see what the economics textbooks see as a strength can have consequences which erode that strength.
the Ministry of Finance, together with the People’s Bank of China and the State Administration of Financial Supervision, jointly issued the “Implementation Plan for the Fiscal Subsidy Policy for Personal Consumption Loans” (Cai Jin [2025] No. 80, hereinafter referred to as the “Plan”).
So the theme of deficient consumption ( a generic amongst the main exporting nations) which was further fed by the end of the property market boom is such that they are now trying to lend money to encourage consumption. Along the way it is a confession that monetary policy has not worked as we have seen interest-rate cuts and record low bond yields. Even direct attempts to boost the money supply via Reserve Ratio cuts for the banks. So at this point they are rather like us decadent imperialist westerners.
There was a question and answer session at the Ministry of Finance where we were told this.
Consumption is a key link and important engine of national economic growth. Vigorously boosting consumption is not only an important measure to expand domestic demand and consolidate the “ballast stone” of economic growth, but also a crucial part of improving people’s well-being and meeting their ever-growing needs for a better life.
This is a change on the previous policy which pushed manufacturing, exports and investment. Or rather an addition to that policy as for example the push into electric vehicle production headlined by BYD exhibits that. The catch is that what starts as “export-led growth” straight out of economics 101 keeps ending up with weak consumption and domestic demand. There is a confession to this below.
Consumption should be used to boost and smooth the economic cycle, and consumption upgrades should drive industrial upgrades.
Also this move comes from the top.
The Party Central Committee and the State Council attach great importance to boosting consumption.
What can the Chinese consumer expect to get?
Consumers will get cheaper loans.
this policy focuses on the demand side, directly benefiting individual consumers and reducing the cost of personal consumer loans. The subsidy funds will be directly deducted from the interest collected by the relevant loan processing institutions from the borrowers.
In fact very cheap loans.
Second , the interest rate for personal consumption loans is 1% per annum, roughly equivalent to one-third of the current commercial bank personal consumption loan interest rate.
So a discount or subsidy of around 2% on the interest-rate. So it is as Frank Zappa put it these loans are cheaper than cheap. By comparison a new personal loan in the UK costs 8.42% and a new mortgage 4.34% on average.
You can borrow up to this.
For single consumption in key areas exceeding 50,000 yuan, the interest subsidy is capped at 50,000 yuan.
So a bit over £5000 in UK terms.
The list of what you can borrow against is pretty comprehensive.
This policy covers a wide range of daily consumption, including food, clothing, housing, and transportation, as well as key areas closely related to residents’ lives and requiring relatively high capital investment, such as family cars, elderly care and childbirth, education and training, cultural tourism, home furnishings, electronic products, and health care.
Let us now move on but not before reinforcing the point that including food makes you think. Are they implying some Chinese need to borrow to eat? That also has the corollary of if so how will they ever repay the loan.
Oh and if the past is any guide this sort of thing has an awful habit of becoming permanent.
Fifth, regarding the policy duration, the policy will be implemented for one year, specifically from September 1, 2025, to August 31, 2026.
Property Market Problems
There was a reminder of an old friend earlier.
CHINA #EVERGRANDE: CONTINUED SUSPENSION OF TRADING UNTIL DELISTING LISTING OF SHARES WILL BE CANCELLED WITH EFFECT FROM 9:00 A.M. ON 25 AUGUST
And I mean an old friend in the hello darkness sense.
CHINA EVERGRANDE LIQUIDATORS SAY THEY HAVE DEBT CLAIMS WORTH $45 BILLION
Interesting also that the claims are presented in US Dollar amounts.By comparison the assets have pretty much disappeared assuming they existed.
FT (£) Liquidators of failed property developer China Evergrande have recovered just $255mn of assets, including a Claude Monet painting. The assets recovered amount to less than 1 per cent of the group’s total assets of Rmb1.8tn ($250bn) in 2022. ( @peterproperty)
Returning to today’s theme the property market boom was supposed to boost consumption via what central bankers would call wealth effects. But over the past 4 or 5 years we have been observing the way that the bust has been subtracting from it and that does not look like happening any time soon if this from earlier this month is any guide.
July, China property sales decline accelerated. Top 50 developers reporting 1/4 to 1/2 sales plunge. The speed of deterioration is staggering. ( @HAOHONG_CFA )
Yuan Devaluation
This is another long-running issue and here are my words from June 30th 2023.
We see that the countries with the most mercantilist trade policies are also running a plan for a lower currency. In one case it is a depreciation and the other more of a devaluation but the end game is the same.
So this from Michael Pettis earlier attracted my attention.
Caixin analyses are usually a lot more sophisticated than this one, which argues that “Expectations for the yuan’s growing role on the global stage have strengthened in recent months, as the currency has held steady while the U.S. dollar has weakened.”……..But then it notes that by “steady”, it means that the yuan was stable against the dollar. Of course that must mean that the yuan has weakened exactly as much as the dollar.
So we can add that to the series never believe anything until it is officially denied.
Comment
It did not take long for us to discover the reason behind this new policy announcement.
CHINA’S NEW YUAN LOANS TURN NEGATIVE IN JULY, FIRST TIME SINCE JULY 2005 (mktnews.com)
In terms of the numbers there was this.
New yuan loans -0.43 trillion yuan, Prev. 2.3. ( CN Wire)
So as Taylor Swift would put it we have a case of “trouble,trouble,trouble” and perhaps a panic move in response. If so that would be the second panic move in less than a year as on September 24th I was looking at issues like this.
The third is to create new monetary policy tools to support the stable development of the stock market.
I have picked that part out because you could argue it worked.
Don’t invest in China they said… luckily I did! +35% as of Sep’24 lows. Hang Seng even performed better with +69% returns as of Jan’24 lows. Both back to 21-22 highs. ( Steef)
But not in terms of the wealth effects or we would not have had today’s announcement.Also lots of stock markets are hitting highs.
Let me finish by noting the money supply data.
M2 money supply +8.8% y/y; Est. +8.3%; ( CN Wire)
So as we have essentially zero inflation according to the official figures then it should be boom,boom,boom in around a couple of years.Except the Chinese clearly do not believe that themselves…..
