Central government versus free markets

July 1, 2013 admin

In today’s blog post, I wanted to follow up on my earlier musing regarding the residential market situation in China. As you probably remember, I wrote about the administrative measures that the Chinese central government used to cool unrelenting price increases in these markets.

According to data from multiple sources, the government is losing and the free markets are winning. Prices keep on climbing, albeit at a slow pace, despite all the restrictions that the government threw at the markets. The free markets are clearly a winner in Round One.

Another bout of the battle between the government and the markets took place recently. The People’s Bank of China withdrew its periodic infusion of liquidity, which caused the system to almost shut down with the overnight interbank lending rate shooting up to around 25 percent.

Chinese banks use the overnight interbank rate to dress up the performance of their so-called Wealth Management Products, among many uses, that are often tied to loans extended to shaky deals. These products promise massive returns, much higher than people can get from their bank deposits, provided everything goes well. Too much of a good thing can be bad for you, and the government decided that it was too much of a good thing. So the People’s Bank of China engineered a short squeeze, which turned out to be successful, at least in the short term, as the issuance of Wealth Management Products has come down and the system survived, albeit with a huge jolt. But individual investors in China have few alternatives to low-paying deposit rates, so the demand for higher-yielding products has not disappeared.

It’s early days, and we have not seen all the consequences yet. It will be interesting to see how the government will proceed after causing this huge spike in the overnight interbank lending rate, which was not good for anyone but the government itself. So stay tuned, and I will update you again in my blog as soon as we see more interesting developments.

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AlexFinalv3webAlex Eidlin is managing director – Asia Pacific with Institutional Real Estate, Inc.

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