PBOC easing
Last week, China’s central bank made two shifts in monetary policy. The PBOC’s move is not surprising in light of recent data indicating falling economic activity in the country. But the bank has in this case chosen slightly unusual policy levers. Today, I look briefly at the first, a decrease in mortgage rates for first-time homebuyers.
Lower interest rates could well entice new buyers into the property market, and increase the principal such buyers are willing to borrow. In sectoral terms, this would promote a shift of housing inventory from developers to households. This in turn would allow developers to pay down debt. These T accounts indicate the balance-sheet adjustments, supposing that the lower rates do indeed attract more household borrowing:
To be clear, this does not have any effect on incomes or on GDP: the level of unsold properties is already high, so developers can satisfy increased demand for homes without needing to build more of them. Instead, the main effect is to move housing stock, and housing debt, from developers to households. If that does materialize, it would reduce an important source of financial instability.
The second policy move was to lower commercial banks’ dollar reserve requirments, which I’ll look at next time.