Central bank wants to boost economy with interest rate cuts

After the presentation of sobering economic data, the central bank unexpectedly cuts interest rates – a signal of how worried those in power in Beijing are.

China’s consumers are unsettled and are buying less.

Thomas Peter / Reuters

The interest rate cut announced by the People’s Bank of China at the beginning of the week came as a complete surprise to most experts. Hardly had Chinas National Statistics Agency With key economic data released for July, monetary authorities said the interest rate on medium-term loans would fall 10 basis points to 2.75 percent. At this rate, the central bank provides commercial banks with loans with a term of one year.

The trigger for the unexpected rate hike was significantly worse than expected economic data for July. While there were still signs of a slight economic recovery in June after several Covid lockdowns were lifted, things went downhill again the following month, and surprisingly so. In July, retail sales grew by only 2.7 percent year-on-year; in the previous month the increase had been 3.1 percent. As in May and June, sales in the hotel and catering industry shrank again in July. After a recovery in June, car sales also weakened again in July.

Investments in the manufacturing industry, in the real estate sector and in infrastructure also lost momentum in July: while fixed investments in June rose by 5.8 percent year-on-year, growth in July was only 3.5 percent. The only bright spot in July was industrial production. It grew by 3.8 percent compared to the same month last year, after 3.9 percent in June. Industrial production is being driven primarily by the recently stable exports. However, after the lifting of large-scale lockdowns in the metropolitan areas of Beijing and Shanghai in the spring, catch-up effects are having an impact.

New lockdowns slow down the momentum

The reasons for the pronounced economic weakness are the worsening crisis in the real estate sector and the zero-Covid strategy, which China is sticking to at the behest of state and party leader Xi Jinping. After the two-month lockdown in the economic metropolis of Shanghai was lifted at the beginning of June, the authorities have now again imposed lockdowns in Xinjiang, Tibet and on the tropical island of Hainan in southern China. Hainan is one of the most important tourist destinations in China with correspondingly great economic importance. Around a million residents have been stuck in the city of Sanya in the south of the island since August 12, including 80,000 tourists.

In the real estate business, which accounts for around a quarter of the Chinese economy, there is still no sign of easing even one year after the start of the turbulence on the housing market. In July, house and apartment sales fell 28.9 percent compared to the same month last year; a month earlier the slump was only 18.3 percent. Investments in the real estate sector shrank by 12.1 percent in July, more than in June. Real estate prices developed accordingly. They fell again in the 30 largest cities in China in July.

Measures to support have achieved nothing

All the measures to support the ailing sector, such as easier access to real estate loans, do not seem to have worked so far. The reason for this is the deeply disturbed confidence of the Chinese in the real estate market. The main source of uncertainty in the industry is the fact that numerous buyers of apartments whose completion is delayed have suspended installment payments on their loans in protest. It is true that the proportion of stalled projects in all real estate projects is comparatively small. However, the loss of trust is immense. In order to remedy this, the central government would have to come up with a holistic, coherent solution.

Beijing leaders are growing increasingly nervous about deepening economic disruption, and with good reason. Dissatisfaction is also increasing among ordinary Chinese, who are feeling the crisis more and more in their wallets. Above all, smaller companies such as restaurants or hairdressers no longer pay their employees or fire them completely. At the same time, food prices are rising – also due to repeated interruptions in supply chains.

Youth unemployment rose again in July. It’s now 19.9 percent, up from 18.4 percent in June, and grumbling is growing among young people. There is hardly anything the government fears more than dissatisfied citizens who will take their anger out onto the streets and possibly cause difficulties for those in power.

The worst possible timing for Xi

For Xi, the economic crisis comes at the worst possible time in his career. At a party congress of the CP, which is expected to take place at the end of November, Xi wants to be elected for a third term as party leader. It is a not uncontroversial novelty, as previously there was a limit to two terms of office. In this critical phase of all things, Xi cannot offer the people what China’s rulers have always been able to offer their people in return for giving up political participation: steadily growing prosperity.

And an improvement is not in sight for the time being. On the one hand, China wants to stick to its zero-Covid strategy, which means that further lockdowns are programmed. On the other hand, the low effectiveness of the latest stimulus measures reveals how badly China’s economy is now suffering from structural deficits such as immense debt, which has driven the real estate market to ever new heights in recent years. A good forty years since the beginning of the reform and opening-up policy, China is at a turning point.

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