China’s crackdowns against the property sector and its technology giants have jolted financial markets, sparking a debate about whether or not China is still “investable”, reports Financial Times.
About the crackdown against the property sector
Combating contagion from the woes of Evergrande and other property developers spreading into the broader economy requires an effective countercyclical policy response. But that response has not been forthcoming so far and the reasons for Beijing’s inaction are unclear.
Despite an unprecedented credit expansion lasting more than a decade, China has not faced a debilitating financial crisis or a sharp slowdown in growth.
At some point, waiting too long to respond to the current property market turmoil will generate too much contagion.
Impact of Beijing’s obsession with political stability
Beijing’s obsession with political stability has generated a long record of authorities being credibly expected to respond to even minor episodes of financial stress in order to calm markets.
But the credibility of this expectation depends upon the policymaking process working as it has in the past.
Economic analysts vs Political analysts
Beijing’s long-term objectives will not matter if the near-term tools of economic adjustment falter. Most economic analysts argue that Beijing will be forced to back down on controls targeting the property sector, given its importance to the economy.
But political analysts argue there is growing evidence that the leadership’s campaigns to reshape the economy are constraining the countercyclical responses that markets are accustomed to seeing.
As economic policy tools are newly infused with political significance, technocrats face fresh difficulties reversing course or balancing messages from leadership.
Similarly, these analysts argue the centralisation of authority has weakened some of the balancing forces within the party-state system that might correct policy mistakes midstream.
As a result, while the outcome of this debate is still uncertain, policy overshooting has become a far more significant risk.
Central Bank’s response
In 2013, China’s central bank tried to reduce speculation in the interbank market by staying silent in the face of a sudden payment default. The banking system almost shut down in response, with short-term rates reaching 20 to 30 per cent.
The central bank was forced to relent and inject liquidity, a precedent that facilitated the rapid expansion of the shadow banking system. Beijing’s objectives were understandable, but the methods used created the opposite effect to what was intended.
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Source: Financial Times
