Central bankers are keeping the art of witchcraft alive
Beijing has been determined to de-leverage an economy facing rising financial risks such as soaring bad loans and a rampant shadow banking system lacking proper regulatory oversight.
Last month, the PBOC said it would prioritise liquidity as a further slowdown was seen.
SCMP, May 11
They say that the days of witchcraft are past, that brooms are now only for sweeping floors, not for riding on at night against a backdrop of the full moon. We no longer drown accused sorcerers to see if they were.
Perhaps so, assuming always that we ignore Druid loony clubs in Britain, but I sometimes think all we have done is shift the focus of witchcraft. It is now to be found in the policy meeting rooms of the world's central banks.
Take for instance the universal belief in these temples of monetary mystery that all one need do in times of trouble is invoke the spell of QE by making the proper incantations. Just drop interest rates to zero and pronounce the words, "Let there be liquidity". Liquidity will then re-appear and all will be well again.
Except that it has never quite worked that way, as equine specialists have always known. You can lead a horse to water but you can't make it drink. Likewise, you can lead a person to money but you can't make him borrow. He will only do it if he wants to do it.
And the only time he really does want to do it is when he is reasonably confident that he can put the money properly to work and make a greater return on it than the interest he will owe the lender. If he does not have this confidence he will not borrow the money.
This kind of self-discipline in returns on investment is not one that prevails in the halls of academia and unfortunately, it is mostly academics in control of the world's major central banks these days. They try to defy the logic of how money flows by effectively dumping it into the hands of commercial bankers.
Invariably the commercial bankers then just place it back as deposits (ahem, reserves) with their central banks and gain a very slight interest margin on the exercise.
Thus the ... ahem ... reserves of US depository institutions with their Federal Reserve system now amount US$2.6 trillion, which is 250 times as great as it was seven years ago when the Fed came up with this daft idea at the onset of the 2008 financial crisis. You can lead a horse to water...
But while this so-called quantitative easing has done little for the main-street core of the US economy (full-time employment is still below its 2007 levels), the dealing zoos of New York have found the magic entirely to their liking. The S&P 500 stock market index is up 184 per cent from its 2009 bottom. QE has proved the perfect tool for creating wealth disparity.
All of this is by the by in Beijing. They are dedicated followers of fashion up there and if the fashion in central banking is QE then the People's Bank of China will adopt it. The PBOC might otherwise not be considered a real central bank, you see. These things are important, you know.
Thus down the road of QE we go with three interest rate cuts since late November and already some of the results are in. Liquidity has continued to dry up with M2 money supply growth in March falling below 10 per cent year over year, which is the lowest I can find on record.
This horse won't drink. The property market is in retreat, industry finds its margins pinched and the evidence of a net outflow of money on the balance of payments grows by the day. This is not a time in which potential borrowers will gear up for the next big growth push.
But the PBOC decision to prioritise liquidity has certainly found its way to financial markets, just as in the US. The Shanghai stock market is up some 80 per cent since the first of the three interest rate cuts was made. The speculators up there just love this kind of magic, love it to pieces.
Get out your broomsticks.