Does China'S Monetary Policy Work?

At the end of the week, the central bank dropped again, which is the fifth time this year to cut interest rates and the fourth reduction. However, the economy has yet to improve. The market can not help worrying that China has fallen into a liquidity trap. Monetary policy, even if lax, can not drive demand back up.

Commodities did not rise or fall after the announcement of the two downgrades showed that the pessimism of the market to the economic fundamentals has reached the acme.

There is no doubt that the marginal utility of monetary policy to stimulate the economy will be weakened as the debt rate of Chinese enterprises rises and the rate of return on capital is reduced. It is very difficult to achieve immediate results in the past.

But is monetary policy really ineffective?

Of course, it is unrealistic to expect enterprises to become the main body of leverage again. After all, excess capacity has not yet been cleared, and credit expansion is hard to sustain.

But leverage can be pferred. From the perspective of social and financial structure, the main body of financing this year is shifting from enterprises to residents and government. The former debt /GDP has reached over 120%, while the /GDP of residents and governments is less than 60%.

The growth rate of residents' financing has been higher than that of corporate finance since 13 years ago. The gap between the two sides has expanded further this year.

The underlying incentive is the reduction of interest rates to improve housing sales, but the deep driving force lies in the income distribution of households under the background of economic pformation and the improvement of debt capacity.

The main feature of China's economic pformation is from industrial leading to service oriented.

In the 13 year, the third industry accounted for the first time in the GDP industry over second industries. In the second half of 14 years, the second industry growth rate began to decline continuously, but the third industry was not affected, and continued to be in the opposite direction.

In the three quarter, GDP growth rate fell below 7%, but the decline was lower than expected, mainly because the boom in the three industry continued to rise.

In addition to the slowdown in the growth of the financial sector by the stock market, the growth rate of other industries such as real estate, pportation, catering and lodging is faster than that in the two quarter, and the economic structure is indeed showing signs of improvement.

Compared with second production, three production can be more effective to increase the proportion of residents in the income distribution, so the rise of three production must be accompanied by the increase of residents' income and consumption capacity.

In the past, residents' income growth generally lagged slightly behind the nominal growth rate of GDP, but this year there has been a continuous departure from the trend of the two. The growth rate of residents' income has not risen, but has continued to grow by about 2 percentage points higher than the nominal growth rate of GDP.

Even after the stock market crash, the growth rate of disposable income of urban residents continued to rise to 9% in the three quarter, and the growth rate of real estate sales and consumer goods retail also remained stable. The negative wealth effect caused by the stock market crash was not obvious.

The rise in incomes and the decline in interest rates undoubtedly raise the ability of residents to purchase houses through mortgage loans. Most of the demand for the promotion of real estate sales in second tier cities is mostly improved or first home buyers, and there is hardly any speculative demand, because the development of service industry will inevitably lead to the further concentration of population into big cities, and the real estate will be similar to that of real estate.

That pattern of differentiation, not total collapse.

After the current round of double falls, the benchmark lending rate for more than 5 years fell below 5% for the first time. After considering the discount of 8-9, the real mortgage interest rate was between 4-5%. For the first time in many years, it was close to the financial return rate, and the financial products could be regarded as the opportunity cost of the residents' purchase. The narrowing of the two spreads meant that the delayed effect of the real estate on the real estate demand was weakening.

Therefore, when interest rates fall to the present level, the willingness of residents to increase leverage may be further enhanced, and the trend of real estate sales warming is expected to continue.

Another main body of alternative enterprises plus leverage is the government.

3 trillion after the replacement of local debt, plus the budget deficit this year, the growth rate of government financing is expected to reach more than 40% at the end of the year.

The special construction bonds issued by policy banks are essentially helping the government to increase leverage. This year's issue has been raised to 600 billion yuan. These funds are invested in shed reform and infrastructure projects with interest rates of only 1.2%, making up for local governments.

The problem of shortage, which makes it easier to pry the bank's matching loans, has accelerated in 9.

Government debt is a double-edged sword. Overuse will push up long-term debt risk and squeeze private investment, but in the economic downturn cycle, it is necessary for the government to add leverage to hedge.

Especially for treasury bonds and local bonds, the cost of financing is much lower than that of local financing platforms.

In Japan, the United States and Europe, the policy of monetary policy is essentially in line with the central government's leverage, while the US private sector leverage ratio has dropped significantly before the subprime crisis.

There are several common points in the market that the broad currency is difficult to turn into a broad credit. First, the continuous deflation of industrial products, while the nominal interest rate of loans has reached a new low level, but the real interest rate remains high and the demand for credit is suppressed. The central bank's loan demand index in the three quarter has reached a new low. Second, the debt rate of enterprises is high, and the proportion of interest payments to social financing has reached nearly 50% in 14 years, which makes the incremental funds available for investment in financing funds less and less. Third, the rate of non-performing loans continues to rise and the credit risk preference decreases, and the problem of credit crunch is widespread.

But since the three quarter, the growth rate of social financing has stabilized. The impact of the stock market crash and the depreciation of the renminbi seems to have failed to trigger a sustained contraction in credit. The low interest rate's underpinning role in the economy is emerging.

I believe that we should not underestimate the positive impact of monetary policy loosening on China's economy. The economic downturn in the first three quarters is the result of monetary policy being not adjusted promptly and smoothly. With the easing of the central bank's efforts and the effective reduction of financing costs, the cumulative effect of the policy should be expected to drive the improvement of the real economy in the next 2-3 quarters.

The main factors affecting the pmission mechanism of monetary policy in the first half of the year were the crazy rise of the stock market, the excessive new returns and the allocation of capital income distorting the risk-free interest rate system, making the short-term interest rate decline unable to effectively pmit the financing cost to the real economy.

After the outbreak of the stock market crash in the second half of the year, capital began to flow back to the bond market, the long-term interest rate dropped sharply, and the interest rate and loan interest rate of corporate bonds were reduced.

Gradually spill over into bond market and credit market.

In the first half of the year, the stock market flourishing, but the amount of financing was very limited. Most of the funds were "real to the virtual". The rise of the bond market in the second half of the year was accompanied by a substantial increase in the amount of financing. In September alone, corporate debt financing reached 370 billion yuan, which was close to a record high and achieved a real pfusion effect on the real economy.

On the other hand, with the significant drop in interest rates, the burden of interest payments has also been lightened and liquidity has begun to improve.

The growth rate of corporate deposits has been rising for three consecutive months, which means that the funds available for investment in financing funds are increasing.

Compared with the rate of return on capital of non financial listed companies (excluding investment income after EBIT/ all invested capital) and loan weighted interest rate, the former is near 6.5%, the latter two quarter has dropped to 6%, and the two half interest rate cut in the second half of the year is expected to further decline to 5.5%.