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China Is Killing Its Bond Bull to Save Main Street

Shuli Ren

(Bloomberg Opinion) -- You’ve got to feel for central bankers. Their hearts are in the right place, with all these efforts to help Main Street businesses weather a bad economy. But their largesse often ends up on Wall Street, in the pockets of traders and big corporate treasurers. 

The People’s Bank of China sure knows how that goes. Since the beginning of June, the central bank has refrained from easy cash injections, which send liquidity to all the wrong places. Instead, they’ve chosen an even more targeted approach, beefing up programs that offer complex special-lending vehicles to small businesses. Last week, via open-market operations, the PBOC net drained 450 billion yuan ($63.7 billion) from the banking system, the most since mid-February. 

Traders moaned. Markets are now dialing back expectations for a cut to the benchmark bank-lending rate, while corporate bond yields jumped. In the first week of June, China Inc. net raised only 45 billion yuan from new issues, less than half the amount from a week earlier. No one’s going to rush out and buy new bonds if the two-year secular bull run is coming to an end. 

The PBOC has good reason to hit the pause button. Billions of dollars of easy money hasn’t left the financial system, data compiled by the central bank show. Those with access to liquidity have been playing interest-rate arbitrage instead.

Take so-called structured deposits, a form of high-yielding wealth management product. Rather than paying salaries or shoring up working capital, large companies that took out cheap bank loans and issued low-yielding bonds have been putting their proceeds into such investments, where yields remain elevated. The outstanding volume of structured deposits ballooned to 12 trillion yuan as of April, up more than 2 trillion yuan from the end of 2019. That is no small number. For reference, Chinese businesses net financed 2.7 trillion yuan from bond issues in the first four months of the year. 

Meanwhile, tech startups in Shenzhen are funneling the proceeds from their small business loans into real estate. In the January to April period, secondary sales volume rose 38% from a year earlier. That compares with declines of 30% to 60% in Beijing, Shanghai and Guangzhou. It appears Shenzhen’s entrepreneurs were busy visiting (sometimes virtually) their realtors when they should have been building prototypes. 

So while China’s credit growth may look impressive, how much of that money actually went into the real economy remains an open question. Monetary easing has merely turned entrepreneurs into day traders and portfolio managers.  

There’s also the overwhelming sense among the Chinese that looser policy will only benefit the rich. Since cash is trash, as Ray Dalio — who’s worshiped in China — famously said, the middle class is rushing into residential property to protect their wealth. The sector has already bounced back. In the first week of June, sales volume across 33 major cities rose 14% from a year earlier, making home ownership even more unaffordable than before.

To its credit, Beijing has taken action. The banking regulator has told some mid-size banks to limit their structured deposits offerings, thereby cutting off an important carry trade that big companies have been playing. It has also instructed banks to watch closely what businesses are doing with their subsidized loans. 

But window guidance can go only so far. When the business outlook is grim, and the purchasing power of the cash sitting in your bank account is constantly getting diluted by soaring stock and bond prices, the only rational thing to do is jump on the bandwagon and day trade. The PBOC is wise to pull back.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. She previously wrote on markets for Barron's, following a career as an investment banker, and is a CFA charterholder.

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