China should be studying the lessons from Japan’s lost decades and heeding them.
Xi Jinping has a growing list of things to worry about: Covid-19, crashing property values, inflation, Nancy Pelosi, you name it. But the Chinese president’s biggest problem might be in Tokyo.
Something strange is going on amongst Chinese banks: a whole lot of lending from institution to institution. Last Friday, bank-to-bank dealing in the overnight repurchase agreement market hit a record of more than $900 billion. This is what happens when you run out of productive things to do with the tidal waves of capital the central bank churns into the financial system.
It’s precisely the sort of “liquidity trap” about which John Maynard Keynes warned decades ago. It’s how credit-creation mechanisms freeze up. Students of Japan’s 2000s know the drill. They also know this is very much not where Xi wanted the People’s Bank of China—or his economy—to be in 2022.
As economist Ming Ming at Citic Securities tells Bloomberg, “excess cash is piling up in the financial system instead of being funneled to the real economy.” Despite so much PBOC-created cash sloshing around, China’s banks are resorting to the financial equivalent of talk amongst themselves.
For years now, economists like Nobel laureate Paul Krugman worried China might fall into a Japan-like funk. That was after the 2008 Lehman Brothers crisis, when the globe followed the Bank of Japan down the quantitative easing path.
The details of China’s quandary are different than what the Krugman’s of the world expected. Descending into deflation doesn’t seem to be Beijing’s challenge.
