China’s Nips and Tucks Won’t Stop Leverage Buildup
The central bank is creating an arbitrage hole that will misallocate credit and store up new Covid-19 troubles.
The People’s Bank of China in the coronavirus era.
Photographer: Emmanuel Wong/Getty Images
China’s central bank is nipping and tucking across the financial system. It still looks ugly – and will only get worse.
As Covid-19 and its aftershocks have rippled through the economy, the People’s Bank of China has tried to boost lending by easing various rates. On Monday, the bank cut the recently introduced de facto benchmark funding cost by 20 basis points, after lowering it earlier this year. It has also slashed the interest charged on excess reserves for the first time since 2008. While liquidity remains sufficient, all the trimming hasn’t substantially moved the needle given the severe hit from the pandemic.