Talk, and action, recently to ‘stimulate’ the Chinese economy seems to have ignored the fact the government have been trying this, and via pretty much the same route i.e. lower interest rates, since 2021.
We can see it hasn’t been very successful since then so why (on earth!) do some think it’s about to start working now?
Zhenyu Gao from the Business School at the Chinese University of Hong Kong (et al.) have had a closer look at the consumer response to those lower interest rates since 2021.
One thing is abundantly clear, lower rates have led to a counterintuitive mortgage repayment tsunami from Chines home owners.
The last full year data was available in the study (but there’s more up to date information elsewhere that confirms the trend is ongoing) showed in 2022 Rmb4.7trn of mortgages were repaid (U$700bn) or about 12% of the entire system residential mortgage loan book.
What’s going on?
China doesn’t permit mortgage refinancing. So, if rates decline (and if you have some savings), due to the stickiness of mortgage rate calculations you don’t benefit initially. Banks however immediately respond with lower rates on deposits and Wealth Management Products. Thus, many homeowners find themselves worse off when rates go down, at least for a time.
It gets worse; part 1. The money taken from deposits to repay mortgages leads to a decrease in banks profitability and represents a general contraction of consumption which is 180-degrees the opposite of what’s intended.
It gets worse; part 2. After the mortgage repayment a household should be better off and this should lead to higher consumption. Er, not in China. It seems households look at their reduced savings and, seeing their security nest-egg compromised, reduce consumption even more after the exercise.
In theory there could be system benefits as banks find themselves with more liquidity to lend to other areas of the economy. In practice however we can see what’s actually happening.
My two-pennyworth. Monetary policy in China has been ineffective in stimulating demand for several years, and you’d think the planners would have noticed?
A monetary response that fails to take into account not only experience so far but scared consumers and corporate borrowers represents only harder pushing on a piece of string, IMHO.
The paper has more and you can access it in full via this link Mortgage Prepayments in China and Monetary Policy Transmission.
Happy Sunday.