The Chinese central bank lowered two of its benchmark interest rates again this year, a move aimed at supporting an economy weakened by the housing crisis and health restrictions. China is the latest major economy to maintain a strict so-called “zero Covid” health policy, which leads to lockdowns and unexpected business closures as soon as positive cases are discovered, penalizing activity.
For its part, real estate, which together with construction represents more than a quarter of China’s GDP, has been suffering since the measures adopted by Beijing in 2020 to reduce the sector’s debt. In the second quarter, the Asian giant saw its growth slow considerably in a year to +0.4%, its worst performance since 2020. China again revealed disappointing economic indicators in July.
In this context, Beijing, which seeks to stimulate the recovery, proceeded on Monday to a new rate cut. The one-year prime lending rate (LPR), which is the benchmark for the most advantageous rates that banks can offer to businesses and households, has been reduced from 3.70% to 3.65%, and the The five-year mortgage reference has been cut from 3.70% to 3.65%. 4.45% to 4.3%, the bank said.
at its historic low
These two rates are now at their historical lows, unlike the other large economies that tend to raise them. The one-year LPR was last reduced in January, the five-year LPR in May. The move is supposed to encourage banks to lend more at better rates, which in turn should support activity.
This will “relieve pressure on indebted companies,” said analyst Julian Evans-Pritchard of Capital Economics. However, this decision may not be enough to reinvigorate the economy, warns Mr. Evans-Pritchard. The country has faced an epidemic rebound in recent weeks, limited in terms of cases but affecting many provinces and penalizing recovery.
Tens of thousands of tourists are especially confined to the tropical island of Hainan (south), a very popular destination in China at this time of year. Positive cases of Covid-19 have also been registered in Tibet (west) and Xinjiang (northwest), two regions highly dependent on tourism for the local economy. Also, due to high temperatures, several provinces are rationing electricity with several factories and businesses closed and intermittent power outages for some of the inhabitants.
These difficulties are added to the challenges that already weighed on the Chinese economy: slow consumption, Beijing’s turn against several dynamic sectors, including technology, the slowdown in the global economy and the real estate crisis. In recent months, sales and property prices have been falling in many cities.
Risk of bankruptcy of Evergrande
The fault of the promoter Evergrande, whose debt of up to 260,000 million euros and the risk of bankruptcy cause a crisis of confidence among potential buyers. Financially weakened, some groups are now struggling to continue their projects and deliver homes sold before they were built in a timely manner. At the risk of aggravating the crisis in the sector, a growing number of furious owners are refusing to pay their monthly installments in retaliation.
To support its economy, Beijing had already unexpectedly lowered its refinancing rate to banks (Repo) last Monday, after the publication in July of disappointing economic indicators. Beijing has set itself the goal this year of increasing its gross domestic product “by approximately 5.5%”. This figure would mark China’s weakest growth rate since the early 1990s, excluding the Covid period.
But many economists doubt that it will be achieved. This growth slowdown comes in a politically sensitive year in which, barring a cataclysm, President Xi Jinping will be re-elected as head of the Chinese Communist Party (CCP) in the fall.
Source: BFM TV
