The difficult age

China monetary policy enters difficult adolescence

China's economy is in the throes of financial adolescence. One consequence is that, when faced with surprises like the cut in interest rates on November 21, it doesn't always do what it is told.

If all credit in China still came from banks, as it mostly did a decade ago, a reduction in the benchmark rate set by the People's Bank of China would benefit most borrowers. The adjustment would not be immediate: though most bank loans have floating rates, they are re-evaluated quarterly or even annually. But the effect would be widely spread.

In the past few years, however, China has sprouted all kinds of new ways to save and borrow that don't respond predictably to the central bank's orders. Trust companies, which can set rates as they choose, held 5.2 trillion yuan ($840 billion) of loans at the end of September, more than twice the amount two years ago when benchmark rates were last reduced. Trust loans disproportionately help property developers and local governments. Companies often extend credit to each other based on individual agreements that may not reprice quickly, or at all. Some 5.3 trillion yuan of those inter-company loans have been made, on a net basis, since the second half of 2012.

Even ordinary savers are enjoying a teenage rebellion. A lower deposit rate would, all things being equal, encourage them to take money out of the bank and spend it. But online savings products like the money market fund run by Alibaba's finance affiliate, and wealth products distributed by banks, offer more attractive rates. Money leaving the banks might go not to more consumption, but simply to other kinds of saving.

At least one part of the economy is still pliant: China's currency. That should weaken as rates fall, as a helpful counter to the appreciation of the US dollar. But there too, the system has become unruly. Companies attracted by China's relatively high interest rates have brought in unknown sums through various means, including fake trade receipts. If that cash stops coming in - or flows in the other direction - the central bank's attempt to alleviate China's growing pains may have the opposite effect.