Major central banks have realized that monetary easing or even negative interest rates could do little in stimulating growth.
Instead, it has twisted the bond market to the extreme.
That is why central banks are resorting to other means such as fiscal stimulus.
Such a move in turn has sparked expectations of higher inflation.
As more people believe that fiscal policy would harm the bond market, the appetite for bonds will drop and eventually push up yields.
But some hold the opposite view. Franklin Templeton, for instance, remains positive about the bond market, given that major economies are facing deflation, not inflation.
While the United States finds it hard to tighten in any aggressive way, many emerging economies actually have plenty of room to cut interest rates.
Countries like Brazil, Columbia, Russia or even China have seen falling inflation, which increases the room for easing.
For example, Brazil has kept its interest rate at 14.25 percent for a year. As inflation has already halved during the period, it won’t be surprising for Brazil to cut its interest rate by 2 to 3 percentage points.
China property bubble
China’s situation is more complex. Judging by its slowing economic growth, the country should have plenty of room to ease.
But since the property market is showing signs of overheating, any rate cut risks worsening the situation.
Initially, first-tier cities led the surge in home prices. But now, lower-tier cities like Hangzhou are catching up fast.
Hangzhou, the host city of this year’s G20 summit, has seen a surge in home prices lately, pushing the per square meter price of some projects close to the levels in big cities. The number of transactions in a single day also hit a fresh record.
The average new-home price in China’s 70 major cities rose 1.3 percent in August, the largest increase since 2010.
Several factors are behind the property boom.
Previously when there was a supply glut, the government had rolled out purchase incentives such as lower down payments to help clear the stock.
Along with several rounds of rate cuts and the poor performance of equities, these measures caused massive amounts of capital to flow into the property market.
Local governments have since then introduced some tightening measures, but their impact on the market has been insignificant.
Reinforced by rising land and home prices, and amid a lack of other investment channels, more speculators flock to the property market.
As such, China’s property bubble may simply continue to build up in the short term.
This article appeared in the Hong Kong Economic Journal on Sept. 23.
Translation by Julie Zhu
[Chinese version 中文版]
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