No wonder China’s economy is cooling fast. In spite of Beijing’s three interest rate cuts over the past six months, the real cost of capital has surged to its highest level since the aftermath of the financial crisis as the country’s grinding deflation deepens.
Not only is this anomalous in a world where about $2tn in global bonds are trading at negative yields, it is also inflicting disproportionate punishment on the weakest parts of corporate China as the economy slows.
The real lending rate (the weighted average lending rate plus producer price deflation) rose to 10.8 per cent in March, its highest level since September 2009, according to a research note from Mizuho Securities in Hong Kong (see chart).
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