It’s been a while since we’ve talked about China.

It’s been a while since we’ve talked about China. There are still many concerns about China. It is true that the positive growth rate in the third quarter has made it more visible to some extent that the Chinese authorities have achieved the target of 5 percent. However, it is true that there are still many negative factors such as how to believe the number (of course, the reliability of the Chinese data is low). The immediate number was created, and there are still many negative factors such as the real estate issue in China, the debt issue of local governments (linked to LGFV), the technology and trade dispute between the U.S. and China, and the interest rate gap with the U.S.

However, unlike the first half of last year, when there was no response, the Chinese authorities now seem to have recognized the seriousness to some extent. There is a clear feeling of easing the financial tightening, which began with the lifting of various regulations on real estate and continued to prevent further debt growth.

China has relatively little central government debt, which means that local government debt is very large. Local governments have built up significant debt by making various financing arrangements with real estate as collateral. It’s hard to know exactly how large that is. And it’s known that slowing down the real estate market can bring about a stronger impact than expected. It seems that we’re starting to do some work on that. We start to start doing some real estate projects and supporting local governments by issuing one trillion yuan in government bonds. And if the central government pays out debt and gives it support to local governments, it will have the effect of transferring local government debt to the central government.

So does the central government have a lot of money, and as I mentioned earlier, it draws funds from the market by issuing government bonds. So if the government pulls the money from the market… is it going to run out of funds? You’re right. There’s a slight outflow of foreign funds, including direct investment, from the Chinese side right now. Foreign demand for government bonds is not abundant for now. (Originally, China has a lot more interbank bond transactions.) Commercial banks in China, the main player in the government bond market, have no choice but to buy these issued government bonds. So what kind of money do commercial banks have to buy these government bonds? It leads to this question.

Chinese banks are going to have a hard time pulling through long-term bonds that have maturities similar to government bonds, so they’re increasing their issuance of short-term bonds, and they’re buying mid- to long-term bonds from the central government. I quote an article.

“Chinese banks to issue ‘short-term bonds’ all-time high due to liquidity shortage” (E-Today, Nov. 10, 23.)

So that means that in short-term money markets, banks are sucking up funds. So, wouldn’t that lead to a short-term money market underfunding? Yes, that’s right. So the People’s Bank of China is supplying funds through a seven-day reverse RP, and you can just say that you’re going to continue with that seven-day loan, and then you’re going to borrow it again on a seven-day basis, and then you’re going to borrow it again, and you’re going to have to be in charge of this, and that’s really an extreme job, and that’s why in the short-term money market, the short-term money shortage doesn’t get solved easily, and that’s why there’s this article about it.

“Cross-bank interest rates soar by 50% in the very short term, raising voices for a reduction in the reserve rate” (Newspim, November 7, 23.)

Yes, they continue to supply funds on a seven-day maturity basis… and if you run into a limitation of re-supply, you have no choice but to respond with a reduction in the reserve rate. It’s a case of permanently releasing funds. And that’s why we’re going to cut the reserve rate this month. Can’t we cut interest rates? That’s a way to do it. The problem is that with U.S. interest rates so high, no matter how closed your capital account is, China can have a significant burden to continue cutting interest rates. And you’ve already lowered short-term interest rates a lot. Lowering one-year LPR or five-year LPR can be an alternative. It has less impact on the short-term money market. And another thing is that lower long-term interest rates leads to a bigger reduction in bank margins. Now banks are buying Chinese government bonds. And banks need to do some profitability preservation. So the market expects them to respond with a relatively less burdensome reduction in the reserve rate.

If you look at the process so far, you have local government debt, which the central government pulls … the central government pulls government bonds, and the central government pulls government bonds, and the state-owned banks in China are digesting those government bonds, which could be underfunded by state-owned banks, which could be drawn from short-term money markets, where there’s a lack of funds, and this is a picture of how to solve this by lowering the reserve ratio. Doesn’t it feel like the debt is shifting from local governments to other economic players? So the Chinese authorities seem to be trying to solve the local government debt problem because it’s a system unique to China.

And if we continue this plan, it will certainly not be the root solution, but we will be able to put the local debt problem under the surface for a period of time, because it’s not the root solution, but it’s not the root solution, and it’s the debt that’s going to increase in the future, and it’s going to be a new burden in the future. I’m going to cut back on today’s essay. Thank you.