Channel animal spirits for better future

The People's Bank of China has cut interest rates three times in six months in order to lighten the debt burdens of companies and local governments. But the PBoC's monetary easing accompanied by complementary fiscal and administrative adjustments-has done little to increase demand for new loans. Instead, it has triggered a sharp rise in China's stock markets. The question now is whether that could turn out to be a very good thing.

Some 14.3 million new stock market trading accounts were opened in China last year. And the PBoC's interest rate cuts, together with reductions in banks' mandatory reserve ratios, have fueled a rise in the Shanghai, Shenzhen and ChiNext indexes of 95 percent, 198 percent and 383 percent since January 2013, although the stock market dropped 6.5 percent late last week. China's stock market capitalization grew from 44 percent of GDP at the end 2012 to 94 percent of GDP in early May.

This has important potential implications-both positive and negative. On the positive side, the revival of China's stock market in a low-interest-rate environment represents an important shift in asset allocation away from real estate and deposits. About 50 percent of Chinese savings amounting to as much as half of GDP-lie in real estate, with 20 percent in deposits, 11 percent in stocks and 12 percent in bonds. To compare, in the United States, real estate, insurance and pensions each account for about 20 percent of total savings, with 7.4 percent in deposits, 21 percent in stocks and 33 percent in bonds.