2023-08-21 05:14:51
To reinvigorate the economy, the Central Bank had already cut the rate for its medium-term loans to financial institutions (MLF) last Tuesday.
The world’s second-largest economy in trouble. To revive growth, China wants more loans to individuals and businesses. To do so, the central bank lowered a benchmark rate further on Monday, hoping to stimulate a second world economy with seized engines. Activity is notably penalized by sluggish consumption in a context of uncertainty on the labor market and the global economic slowdown which is weighing on demand for Chinese goods and therefore the activity of thousands of factories. The situation in the real estate sector, with its share of developers on the verge of bankruptcy and unfinished housing, is also a major obstacle to growth. This sector, along with the construction sector, has long contributed a quarter of China’s GDP. In another sign of a slowdown, loans to households last month fell to their lowest level since 2009.
In an attempt to stimulate activity, the Central Bank cut a key rate again on Monday, after a similar measure already last week. The one-year LPR, which is the benchmark for the most advantageous rates that banks can offer to businesses and households, has been reduced from 3.55% to 3.45%. This rate had already been lowered in June. The five-year benchmark for mortgages is unchanged at 4.2%. Highly followed by the markets, these two rates are at their historic lows.
This decision, anticipated by economists, is supposed to encourage commercial banks to grant more credit and at more advantageous rates. The measure should indirectly support activity in a context of economic slowdown. It runs counter to the major economies in the world raising rates to curb inflation.
Real estate crisis
Analysts polled by Bloomberg, however, expected a bigger cut from the LPR, after a meeting on Friday between the Central Bank and financial regulators. In particular, mention was made of the need tosustain“more economy and reduce”hidden risks and dangers“, reported Sunday the official media without specifying their nature.
The long-awaited post-Covid recovery in China after the lifting of health restrictions at the end of 2022 has run out of steam in recent months, while the real estate sector is struggling. The setbacks of developer Country Garden, long reputed to be financially sound and now ultra-indebted, raise fears of a bankruptcy with immeasurable consequences for the financial system in China, two years after the descent into hell of its competitor Evergrande. To reinvigorate the economy, the central bank had already reduced the rate for its medium-term loans to financial institutions (MLF) last Tuesday.
The bad series of indicators, which follow one another in recent weeks in China, increase the pressure for a vast recovery plan in the second world economy, which the power is reluctant to do not to dig into the debt. The government, on the other hand, is multiplying benevolent announcements against the private sector, which was particularly hard hit during the health crisis, but also in favor of consumption, in particular with tax deductions. But these measures are struggling to take effect so far, when one in five young people is unemployed.
Read the fileChina facing the world
“Difficulties” but…
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