To relaunch Chinese growth, authorities in Beijing have asked banks to increase their lending volumes. However, in a country in the grip of a serious real estate crisis, where the economy – despite the brief post-Covid boost – is idling, to the point that the youth unemployment rate has reached the new record of 20%, households and businesses are reluctant to borrow. Under these conditions, credit institutions cannot meet the objectives imposed on them… except to tweak and embark on new financial acrobatics.
Thus, according to the financial information agency Bloomberg, which reports the confessions of several senior executives of six different state banks, some of them “provide loans to businesses and then allow them to deposit the funds at the same interest rate. Others borrow from each other through short-term financing arrangements that can be disguised as new loans to increase volumes. »
In yet another attempt to revive credit and the economy, the People’s Bank of China yesterday again lowered its key interest rates for the second time in a week, bringing them to a new historic low, at contrary to what is happening elsewhere in the world. The one-year Loan Prime Rate (LPR), which constitutes the benchmark for the most advantageous rates that banks can offer to companies and households, has been reduced from 3.7% to 3.65%, and that at five-year benchmark for mortgages was lowered from 4.45% to 4.3%.
Real estate, 20% of GDP
Last week’s July retail sales, industrial production and fixed-asset investment figures showed a sharper-than-expected slowdown in China’s economy after two buoyant months. carried by the déconfines. “Policymakers are increasingly concerned about the prospects for the world’s second largest economy”, analyzes Neil Shearing, chief economist at Capital Economist. Bloomberg consensus forecasters now expect China’s GDP to grow 3.7% this year, a pace well below the 5.5% target set by Beijing.
“Much of the current weakness in the Chinese economy can be attributed to problems in the real estate sector”, recalls Neil Shearing. Until the health crisis, “A multi-year housing boom has led to soaring house prices. And in both cases, the boom in activity has meant that the real estate sector has grown to the point of representing a disproportionate – and unsustainable – share of the economy. In China, real estate now accounts for around 20% of GDP. […] China’s real estate problems are due to over-indebted property developers, who are now struggling to meet their commitments. […] But debt is not the only problem. Indeed, the majority of developer debt (~75%) is in the form of pre-sold homes that have not yet been completed. This reflects a feature of the Chinese real estate market, where around 80% of homes are sold off-plan. The inability of developers to deliver these homes has led to mortgage boycotts, with buyers refusing to make payments for homes they fear will not be completed. »
Goldman Sachs economists, who are among the most pessimistic on China, lowered their 2022 growth forecasts last week from 3.3% to 3%. “In addition to the indicators [d’activité] weaker than expected, China is facing a double headwind, namely rising Covid cases and an unusually hot and dry summer that has strained power supplies and led to production cuts in some provinces and some energy-intensive sectors. » The city of Shanghai has taken measures to save electricity.