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Recent credit shortage not a major concern

QE tapering in the US offers a chance for China to end property-market addiction

Soon after the United States announced a tapering of its bond-buying program, better known as quantitative easing, China's money markets experienced a new credit shortage.

The overnight Shibor, the Shanghai Interbank Offered Rate, rose to a multi-week peak of 4.515 percent on Dec 23, 100 basis points higher than before the US announced its tapering.

The rate ebbed only after the central bank conducted the first reverse-repurchase agreements in three weeks the following day to boost liquidity.

Many have cited this as a sign that China will enter a long period of liquidity squeeze. They suggest the authorities relax their monetary stance to prevent the economy from slowing down.

But is that actually the case?

It is true that the US move will change global money flows, because a tightening of monetary supplies in the US will shore up its interest rates and reverse the depreciating trend of the greenback.

US interest rates have climbed since the second half of the year, when Washington hinted at a pullback from the QE policy. Yields on 10-year government bonds have grown to 2.8 percent from 2 percent since the beginning of the year. The 15-year mortgage rate hit 3.5 percent from 2.5 percent in October.

Since money flows to markets with higher interest rates and stronger currencies, in this case the US market, emerging economies will witness capital outflows and depreciation of their currencies.

This rule will also apply to China, but it is going too far to suggest that the world's largest emerging market will face a severe money shortage. And it is premature to call on the central bank to relax its monetary policy.

To understand this, it is necessary to figure out what is happening in the Chinese money markets.

It is true that there is a money shortage. This can be described as serious in some parts. But the cause of the shortage mostly lies in domestic factors, with the US announcement of tapering QE giving the market an excuse to temporarily hike borrowing costs.

In some cities in East China's Jiangsu and Zhejiang provinces, the money supply has been very tight since the second half of last year. The situation has worsened in recent days, with companies and homebuyers complaining about limited access to loans.

But a better examination of the markets will lead to the conclusion that the markets have money. The truth is that lenders, be they banks or private lenders, are reluctant to lend because of fears that their money will end up as bad loans.

We surveyed about 30 bank executives and private lenders in the two provinces in December. Most of them said they still had money to lend. But the problem, they said, was that they cannot find good investment projects.

In Wuxi, Jiangsu province, a combination of factors such as the bankruptcy of what was the world's largest solar panel company Suntech Power Holdings Co Ltd, which was hugely exposed to local bank loans, weakened bank confidence.

In Wenzhou, Zhejiang province, defaults, bankruptcies and foreclosures are as common as slides in property prices. It is the only major city that witnessed a burst bubble-like reduction in its property market.

In these places the situation is somewhat like what it was in the days after the first round of the QE was launched: The markets were not necessarily short of money, but confidence had been weakened.

But on the national level, money shortage is a myth. Considering China's lending growth rate, high saving ratio and huge turnovers in the stock market, the country has not been short of money in absolute terms.

The recent interbank rate hike was more a seasonal thing. As Chinese banks often recall money at the end of each quarter to polish up their balance sheets, the money markets are subject to seasonal fluctuations, which usually occur at the turn of the year, in June and in October. Interbank rates in December are usually 100 basis points higher than those in November. So the recent Shibor rate hike is not a surprise and the margin does not run beyond the normal range.

In this sense, it is too early to say China is experiencing an unusual money shortage, or to request the central bank to readjust its monetary stance.

The real problem of China's money market lies in its imbalanced structure, which hinders the country's relatively ample liquidity from flowing freely and efficiently.

About 60 percent of China's loans are estimated to go to land and property markets directly or indirectly. The over-reliance created a situation in which the property market "hijacked" the money market.

With money parked in this single sector, real-economy industries have limited access to funds.

In addition, as property development requires time, the turnover rate of money is low and could result in a structural liquidity squeeze. This means that although the markets overall see a huge sum of money, it flows too slowly. When the market needs the money, the property market has absorbed too much funding and refuses to release more, hence causing a sharp increase in overall borrowing costs.

Indeed, the US tapering of the QE program offers a chance for China to kick this property-market addiction.

On the one hand, as international speculative funds, a big slice of which are parked in China's property market, leave China for the US, it is expected that the property price growth will slow down, forcing more capital to leave that industry.

On the other hand, the US pulling back from QE is a strong indication that its economic recovery will be solid, which will boost US demand for Chinese goods. This can be seen in an 11 percent jump in Chinese exports to the US in November. Continued US recovery may speed up the recovery in Chinese manufacturing and trade sectors, helping China shed overcapacity and lure capital back to real-economy sectors from the property market.

Now what China needs to do is to make the money market stable amid the US move, help channel the capital to where it is really needed and prevent the manufacturing sector from repeating the old growth model of simply building on cheap costs.

The authors are financial analysts in Shanghai. The views do not necessarily reflect those of China Daily. 

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