March 28, 2024

China Liberalizes Lending Rates

It was one of the strongest signs yet that the government intends to change the way banks operate and let market forces play a larger role in China, which has the world’s fastest-growing major economy.

The move was also part of a broader strategy to restructure the economy away from investment-fueled growth and reduce the role of the state in the economy, freeing up banks to lend to private entrepreneurs in the hopes of encouraging innovation.The central bank said in an announcement late Friday that beginning Saturday, the government would no longer set a minimum interest rate for corporate loans. That move could allow banks to lower rates and more fiercely compete for customers.

The government, though, chose not to lift its cap on lending rates, nor did it alter the ceiling it places on the rates banks pay to depositors, either of which economists say would have had more far-reaching effects.

Dong Tao, an economist at Credit Suisse, said on Friday that Beijing was showing a stronger determination to reform the financial system. “This is the beginning of China’s rate liberalization,” he said in an e-mail. “Removing the lending rate floor is less meaningful than removing the deposit rate ceiling, but I think the latter will come too in the coming months.”

China’s president, Xi Jinping, and Prime Minister Li Keqiang are pushing bold reforms, even as the economy shows signs of weakening. Economists have been increasingly concerned that in recent years banks in China have done a poor job allocating capital and evaluating risk. Because the government sets caps on the rates paid to depositors and sets minimum and maximum lending rates, Chinese banks benefit from big interest rate spreads far larger than most Western banks. Analysts say this system has also encouraged lax lending standards and may have fueled asset bubbles.

A few weeks ago, the government created a credit squeeze that made it difficult for banks to conduct short-term borrowing. The government said its decision to pull back credit from the overnight lending market was meant to force banks and financial institutions to improve lending standards and better guard against risk. Beijing’s new leadership team, which took office in March, has also promised to make the national currency, the renminbi, more freely convertible and to open up the nation’s capital account, and liberalizing interest rates is believed to be a necessary step before making those changes.

Whether the move on Friday would immediately lower borrowing costs is unclear, since most banks already lend at higher rates than the floor set by the central bank, experts say. But over time the move could help establish more flexible lending and borrowing rates and create a more efficient banking system.

“It means banks could charge rates freely according to their own risk assessments,” said Wang Tao, an economist at UBS who is based in Hong Kong.

The central bank, known as the People’s Bank of China, did not alter the floor it sets on mortgage rates because of worries about property speculation. The central bank also said it was not ready to scrap the ceiling on deposit rates because of the risks involved.

“The central bank will work with other departments to improve the fundamental conditions to liberalize deposit rates steadily and orderly,” the bank said in its statement Friday.

Article source: http://www.nytimes.com/2013/07/20/business/global/china-liberalizes-lending-rates.html?partner=rss&emc=rss

Fed Official Sees Tension in Some Credit Markets

The official, Fed Governor Jeremy Stein, highlighted a surge in junk bond issues, the popularity of certain kinds of real estate investment trusts and shifts in bank balance sheets as areas the central bank is watching closely, although he downplayed any immediate threat to the financial system or the economy.

“We are seeing a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit,” Mr. Stein said in a St. Louis speech. He added, however, “it need not follow that this risk-taking has ominous systemic implications.”

Mr. Stein gave no indication that the Fed is contemplating any change in its aggressive efforts to hold down interest rates. Rather, he described the overheating as a trend that might require a response if it intensified over the next 18 months. But the speech nonetheless underscored that the Fed increasingly regards bubbles, rather than inflation, as the most likely negative consequence of its efforts to reduce unemployment by stimulating growth.

It also showed that theoretical concerns are becoming more tangible.

Critics of the Fed’s policies have pointed to the high-profile junk bond market as evidence that low interest rates are encouraging excessive speculation. Investors are eagerly providing money to companies and countries with low credit ratings – and they are demanding relatively low interest rates in return. Junk bond issuance in the United States set a new annual record last year – by the end of October.

Mr. Stein noted dryly that this may not “bode well” for investors in those bonds, but the Fed is not charged with preventing them from losing money. It is charged with maintaining the function of the financial system and preventing the consequences from dragging on the broader economy.

In the wake of the financial crisis, regulators have focused increasingly on where investors get their money, reasoning that short-term funding is particularly vulnerable to panic. And Mr. Stein said that here, too, there was evidence that short-term funding was growing in importance.

He described similar evidence of growing risks in other corners of the financial market, and emphasized that the Fed was also concerned about other kinds of financial speculation that it did not see.

“Overheating in the junk bond market might not be a major systemic concern in and of itself, but it might indicate that similar overheating forces were at play in other parts of credit markets, out of our range of vision,” he said.

Central bankers historically have been skeptical that asset bubbles can be identified or prevented from popping. Moreover, they tend to regard financial regulation as the appropriate means to prevent excessive speculation and not changes in monetary policy, which affect the entire economy. In other words, when mortgage-lending standards loosen, regulators should tighten those standards rather than raising interest rates on all kinds of loans.

But the crisis has forced central bankers to reconsider both the importance of financial stability and the role of monetary policy.

Mr. Stein said Thursday that central bankers should keep an “open mind.”

Regulators, he noted, can address only problems that they can see. Monetary policy, by contrast, can reduce risk-taking across the economy.

“It gets in all of the cracks,” Mr. Stein said. “Changes in rates may reach into corners of the market that supervision and regulation cannot.”

He said that the Fed also could use its vast investment portfolio to address some kinds of risk-taking because the Fed can reduce the profitability of a given investment by shifting the composition of its holdings.

And he closed on a cautionary note.

“Decisions will inevitably have to be made in an environment of significant uncertainty,” he said. “Waiting for decisive proof of market overheating may amount to an implicit policy of inaction on this dimension.”

Article source: http://www.nytimes.com/2013/02/08/business/fed-official-sees-tension-in-some-credit-markets.html?partner=rss&emc=rss

Off the Charts: In Europe, a Repeat of the Credit Crisis

In the euro area as a whole, the amount of credit outstanding has fallen to levels lower than they were a year ago, according to figures released last week by the European Central Bank. In some countries within the euro zone, including Italy and Spain, credit is falling at a faster rate now than it did during the first crisis.

The difficulty in obtaining credit seems likely to make it even harder for the countries that have been hurt the most to recover and begin to grow again. The figures show that while the E.C.B. has relieved the immediate financial pressures on both governments and banks by making it easy for them to borrow, it has not managed to extend that easy credit to those who need money the most.

The first of the accompanying charts shows 12-month changes in the amounts of loans outstanding in the 17 countries that make up the euro zone, and the lower charts show the state of lending in several of the countries. The bolder of the two lines in each chart shows the change in outstanding loans to nonfinancial companies, while the other line shows changes in total loans to households, a figure that includes both home mortgages and consumer loans.

In the middle of the last decade, loans were growing rapidly in many countries. Interest rates had fallen sharply as markets concluded there was no good reason for rates to be much higher in one euro zone country than another. After all, the currency risk was identical in all the countries.

In Ireland and Spain, the easy credit helped to finance large housing bubbles, which then burst during the crisis. In both of those countries, the amount of outstanding loans rose at a pace above 30 percent a year at the peak of the cycle.

A falling total of loans means that on a net basis, no new loans are being issued, although banks might be relending some of the money being repaid on old loans. In some cases, particularly in Ireland, the amount of loans outstanding has plunged not because loans are being repaid but because they are being written off.

Some countries seem unaffected. In Finland, which has been among the most vocal in demanding austerity in the troubled countries, the amount of loans outstanding continues to grow at a rate of more than 5 percent a year. In Austria and Germany, loan volume is also rising, although at a slower rate.

But in Portugal, the amount of corporate loans outstanding is now lower than it was in the spring of 2008, before the collapse of Lehman Brothers sent world credit markets tumbling. In Ireland, loan totals to both companies and households have fallen to 2005 levels.

Floyd Norris comments on finance and the economy at nytimes.com/economix.

Article source: http://www.nytimes.com/2012/11/03/business/in-europe-a-repeat-of-the-credit-crisis.html?partner=rss&emc=rss

Bucks Blog: There Is No Perfect (or Permanent) Financial Plan

Carl Richards

Carl Richards is a certified financial planner in Park City, Utah. His new book, “The Behavior Gap,” was published earlier this month. His sketches are archived here on the Bucks blog.

Given the amount of time in each day and the number of resources we have at our disposal, it’s only natural that we have an expectation that we’re going to get the decisions we make about money “perfect.”

Over time, we figure out how much money we should spend and define our financial priorities. But then things change and we have to make another decision, leaving us frustrated.

If we have to keep making the decisions over and over, then what’s the point?

Whether we like it or not, life is not static. We don’t live in bubbles. And even though one day may look very much like another, life is rarely the exact same every week let alone from year to year. Perhaps the basics stay the same — work, school, relationships — but little things change, and we learn to adapt to those changes.

We need to think the same way about money. Even after we make smart decisions life will continue to happen.

The decision to save money each month may need to change if someone loses a job. The decision to have another child may mean that you need to buy a new car sooner than planned. The decision to retire early may be put on hold after a health emergency. In each example, no one did anything wrong; life happened.

The unavoidable reality we face is that few financial decisions are set in stone. At some point, we’ll need to recalibrate, to take into account new circumstances that change our decisions. Too often people get caught up in thinking that this recalibration is a sign they made a mistake. Hardly. They just have a life.

In fact, in many ways, if you aren’t recalibrating your decisions as you go, then you’re likely ignoring decisions that will turn into mistakes and compound over time.

But, even as you look to recalibrate, you can’t ignore that some of these inputs will be outside your control, which takes us back to the idea of making perfect decisions. At any given point, we may make what appears to be a “perfect” decision, but there’s only so much that’s in our control.

It all brings the Serenity Prayer to mind:

God grant me the serenity to accept the things I cannot change; courage to change the things I can; and wisdom to know the difference.

Our goal shouldn’t be to pursue perfection in our decision making, but to get really good at knowing when we need to make a change. It will take practice and likely be something you need to do for the rest of your life.

Article source: http://feeds.nytimes.com/click.phdo?i=966bee683872ca2b86781ca9d29d6fbf

Economix: Predicting Bubbles and Crashes

Economics doesn’t have to be complicated. It is the study of our lives — our jobs, our homes, our families and the little decisions we face every day. Here at Economix, journalists and economists analyze the news and use economics as a framework for thinking about the world. We welcome feedback, at economix@nytimes.com.

Article source: http://feeds.nytimes.com/click.phdo?i=b324f36f3567bcda22cb036c6a952485