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Why China’s Trapped Economy Won’t Find Easy Escape
A key measure of Chinese monetary policy effectiveness shows that money created isn’t being put to work.
By ANJANI TRIVEDI
July 21, 2016 4:16 a.m. ET
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Cash is trapped in China. And there isn’t much Beijing can do about it.
In recent months, a measure of Chinese monetary policy effectiveness shows that money created isn’t being put to work. China’s M1 money supply, which consists of liquid assets such as cash and companies’ demand deposits, is rising rapidly. But M2 money supply, a broader gauge, isn’t keeping up. That has led to the emergence of a Chinese-style “liquidity trap,” a theoretical problem economist John Maynard Keynes said shows up when real interest rates hit a wall and aren’t able to stimulate growth.
No matter how much debt China piles on, it isn’t generating much growth. A dearth of high-returning investment prospects has pushed companies to hoard cash, which they’ve been shoveling into short-term, high-yielding deposits. One example can be seen in real-estate developers, who have sold excess inventory, pocketing the cash in deposits, but are too skittish to spend that cash on new projects. High debt levels are also dissuading companies from spending.
Banks, meanwhile, are flooding the market with high-yielding, riskier products in an attempt to offset declining net interest margins and profit growth. At China’s largest bank, Industrial and Commercial Bank of China, fees from these products has risen 45% over the last two years.
The circular relationship between fee-starved banks, yield-hungry companies and savings-rich households means cash isn’t being invested in the real economy. Private fixed-asset investment growth shrank in June. More government spending is normally the solution to a liquidity trap. But the government has already been propping up investment with state spending. Beijing will find getting out of the trap is a lot harder than getting in.
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