Learning from the West, China’s political authorities has clearly been assimilating Keynesian policies of promoting permanent quasi booms, but this time through the manipulation of interest rates…
From Bloomberg,
China’s long-term bonds are offering investors the biggest yield advantage over shorter-maturity notes in six months as Premier Wen Jiabao relaxes lending curbs to combat a slowdown in Asia’s biggest economy.
The gap between the government’s one-year note yields and 10-year securities widened to 102 basis points on Nov. 11 from 62 at the start of the month, Chinabond data show. That’s the most since May 4. The difference in U.S. Treasuries with similar maturities rose four basis points since October to 204, while the so-called yield curve for Indian bonds shrank two to 19, according to data compiled by Bloomberg.
“The curve will continue to steepen because long-term yields priced in too much concern of a slump,” said Wang Mingfeng, a Beijing-based bond analyst at Citic Securities Co., the nation’s third-biggest brokerage by assets. “There won’t be a hard landing, and the loosening measures may lead to a rebound in growth in the second quarter.”
Wen said Oct. 25 that policies will be “fine tuned,” a turnaround after interest rates were increased five times and lenders’ reserve-requirement ratios raised on nine occasions since September 2010 to tame inflation. The central bank has since lowered the yield on one-year bills for the first time since 2008 and injected 163 billion yuan ($25.7 billion) into the financial system…
Here is how China’s yield curve looks like (as of November 11, from Asian Bonds Online)
A steep yield curve induces borrow short-lend long dynamic or maturity transformation which carries the risk of maturity mismatching that could lead to a systemic bust or insolvency.
Yet, to stave off a hard landing, China has recently been expanding loans to reflate the economy (from the same Bloomberg article)
Some 587 billion yuan of loans were granted in October, the most in four months, the People’s Bank of China reported Nov. 11. That exceeded all 18 economist estimates in a Bloomberg News survey.
“This is a meaningful pickup in new loans which suggests selective easing has already started,”Qu Hongbin, a Hong Kong- based economist with HSBC Holdings Plc (HSBA), wrote in a research note. “China has no risk of a hard landing.”…
Add to expansion of loans, China may also be hiking government expenditures… (from the same Bloomberg article)
As much as 1 trillion yuan of public funds will be injected into the economy in December, ensuring abundant liquidity for lenders and making a cut in reserve-ratio requirements unlikely this year, according to Chen Jianheng, a bond analyst at China International Capital Corp. The finance ministry typically does most of its spending at the end of the year, he said
At the end of the day, the same noxious practices of Western contemporaries haunt China’s political stewards. The implication of which would likely be the same consequence—boom bust cycles.
Over the years, politicians have been doing the same thing and expecting different results.
Politics indeed signifies insanity.
