China's Monetary Cycle Driven By Real Estate

Money supply is increased by banks creating money and lending it to borrowers. A lot of marginal borrowing in China is for real estate investment and consumption. Speculative credit is the most volatile. This credit creation is a self-reinforcing feedback loop. The recent economic "stabilization" efforts in China will increase economic volatility because any reversal in home prices will set off a swift and large reversal in credit growth.
About how money is printed out, before pushing through the rice basket of investment-related articles. In order to ensure the continuity of this article, it is necessary to elaborate on it again.

First, to be clear, the circulation of money in the market is almost never printed the printing press, we daily consumption bills to pay only a very small part of the market in currencies.

Money market flows, we can simply be seen as M2, the formula can be simple thought: M2 = maximum base money * money multiplier, which with another formula = M0 + M2 the M1 + time deposits they are not contradictory.

The central bank monetary base (in our country is the People's Bank of China) created by foreign exchange, reverse repo, the mid-lending facilities, commercial banks in the central bank's refinancing, etc. "production" out, if you feel difficult to understand complex, can simply that the monetary base is not cost the central bank, made out of thin air as well.

Base money created by the commercial banking system to be delivered to them, these commercial banks can lend money outside, go out after the loan, the lender will deposit the form of deposits commercial banks, commercial banks can now put these deposits (not to deposit the whole lending finished, retained part of that is the reserve) and then the external lending, and so forth cycle, the market a lot of money this way. "loans becomes deposits, the deposit becomes a loan, the loan then changed deposits" created and formed M2.

Commercial banks can create how much money, depending on the deposit reserve ratio - This indicator is determined by the central bank, the money multiplier formula is the reciprocal of the deposit reserve ratio, according to the current reserve ratio is 16.5%, the money multiplier It is 6.06.

So, you should understand: 1 market. Money supply how much, how much water distribution, almost all of the central bank decided; only the maximum amount of central bank money supply determined 2, the actual number depends on whether commercial banks are willing to lend, and if. there are plenty of lenders willing to lend, this is fundamental to create money.
Money creation for housing creates a positive feedback loop in China because houses are investment goods, so demand rises as prices rise, creating demand for even more credit. The chart below shows investment and real housing demand from the left causing a rise in prices, which increases credit, which increases home prices even more, which increases credit even more.......
Due to the expansion began tier cities and some second-tier cities real housing demand, pushing up prices, began to attract some foresight of funds into promoting the rapid rise in housing prices, which in turn attract more into the speculative / investment funds, further promote the rise in house prices, so cyclical, rising house prices and capital inflows sustainable without end.

The inflows are mostly credit currency, such as the beginning of this article, "how the money is printed out" as the commercial banks through the "deposit becomes a loan, deposit becomes a loan, the loan then changed deposit" to create a cycle of lending money - buyers (new home / existing home ) after a down payment and then pay the balance from bank loans (carrying debt), the developers / owners then take sale proceeds and deposit them at the bank to become the next wave of the mortgage lender's funding sources, this can flow into other sectors (such as the real economy) credit on such real estate cycle inflows, pushing up housing prices completely reduced to money illusion.
Growth in mortgage lending in the first half of 2016 almost equals that of 2015, which was more than a third higher than 2014.
The one flaw is that the positive feedback loop doesn't last forever:
1, soaring housing prices accumulates a certain amount of risk, financial institutions reduce mortgage lending, credit inflows decrease;

2, the central bank stops adding liquidity, the amount of credit contracts, resulting in M2 deceleration (decrease base money and increase deposit rates to reduce the money multiplier);

3, prices are too high resulting in increased down payment and monthly mortgage payments, revenue growth cannot keep up with price increases and no more greater fools;

4, the introduction of property tax and increases holding costs for buyers;

5, out of need the country adjusts policy (such as suppression of inflation, etc.) makes consecutive rate hikes ......
Any of these triggers could create a negative feedback loop which reduces credit growth, reducing home prices, leading to slower credit growth or contraction....

When we say that prices are high, this mainly refers to Beijing-Shanghai-Guangzhou-Shenzhen first-tier cities and some second-tier cities, in fact, the majority of the third-, fourth- and fifth-tier cities home prices are falling.

This wave of skyrocketing housing prices in some cities began in 2015, the same credit stimulus, the results of currency inflows, except that the city began to differentiate and intensify.

Over the years, housing has been on everyone's nerves, the wealth effect has taken the form of path dependence, and made us certain of it. But how much longer will the high price positive feedback loop continue?
iFeng: 警惕房价像股市一样暴跌 对百姓意味着什么?

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