Interest rates

China’s low interest rates fail to stimulate lending in the economy – ‘liquidity trap’

Eamonn Sheridan

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

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

China Friday funding data. New lending has crashed, even as the money supply (M2 + 11%) has risen sharply – i.e. lots of cash is flowing but 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 plentiful, but no one wants it.”

The remarks come from a Bloomberg article (closed, but not closed can be found here):

  • The gap between liquidity and bank lending also increases financial risks, as market interest rates fall well below the policy rates set by the central bank.
  • “Cash is building up in the interbank market and there is even a risk that money will be directed out of the real economy into the markets,” said Ming Ming, chief economist at Citic Securities Co.

The risk of money flowing into the markets could very well translate into a bullish entry for Chinese equities.

ps. On Monday, an MLF matures. A majority of analysts expect the PBOC not to fully defer the maturing amount (i.e. a net withdrawal of cash). On the 20th we get the monthly prime rate of the PBOC loan (preview here).

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