16 January 2019

Central banks find it tough to wean markets off easy money

Hong Kong homeowners have probably asked themselves this question countless times — Will property prices take a big hit if the United States Federal Reserve suddenly decides to raise its benchmark interest rate? While experts believe such theorizing may be a false proposition, it seems to be a consensus in the city that home prices will find it easier to trend downward rather than move up at this stage, given cut-throat competition among developers and other factors.

The property market pressure is undoubtedly reflecting the possibilities of a U-turn in the monetary policy and interest environment, even though it may not directly stem from the Fed tapering.

The first wave of capital flight from emerging markets was witnessed during last spring and summer after the Fed implicitly indicated its fund withdrawing plan. The flight has turned worse since the Fed put its words into action. Amid this situation, investors from Asia to Europe and the United States are selling risky assets to protect their wealth.

Such chaotic markets indicate that weaning the capital markets off easy money is a tough job for central bankers, the Hong Kong Economic Journal’s investor diary argues.

The Fed’s real policy goal should be ensuring stable price levels and full employment, but it’s hard for the central bank to ignore the reaction of capital markets when it makes its decisions.

As the Fed keeps reassuring the market of an extremely-low interest rate environment before formally winding up its asset-buying program, there is probably a long way before the super-low interest rate era ends.

Interestingly, the Hong Kong Monetary Authority’s former chief Joseph Yam published on Monday a working paper titled “Working with Financial Markets: Beyond the Third Party Plenum”, stating that it is now time for the People’s Bank of China (PBoC) to abolish its existing monetary policy regime centering on controlling the amount of money supply. Instead, the central bank can raise the efficiency of capital allocation in the banking system by targeting at cost of funds, he wrote.

As such, lenders can price their loans based on their capital sufficiency and the borrowers’ credit quality. That will benefit the country’s financial and economic development.

There were two periods of credit crunch in China last year, both of which were followed by not-too-aggressive fund injections from the PBoC. The moves suggested that the central bank is perhaps experimenting with a more market-driven fund pricing approach.

But the extremely large amount of new bank loans and aggregate social financing level in January suggests that the PBoC, like the Fed, is also facing difficulties in shifting to a more restrictive monetary policy to bring about a less leveraged economy.

– Contact the writer at [email protected]


Freelance journalist

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