To boost its economy, China lowers key Interest Rates
While maintaining another key lending rate, China's central bank surprised economists who had anticipated more muscular steps to boost economic development in the face of widespread concerns about its course.
Read more: Chinese economy is experiencing deflation as price declines for the first time since February 2021
The second-largest economy in the world is slowing down, has entered deflation, and prices are dropping year over year as the post-Covid economic recovery in the nation is being hindered by slow domestic expenditure.
Due to overextended developers being exposed by the slowdown, China's real estate market is also in trouble. In an effort to reorganise its massive debts, Evergrande Group, formerly China's top property developer, applied for bankruptcy protection in the US on Friday.
The People's Bank of China (PBoC), the country's central bank, has responded by lowering interest rates, but it’s most recent action on Monday caught economists off guard because they had anticipated a more significant shift.
China decreased its benchmark one-year loan prime rate, which is primarily used to price mortgages, from 3.55% to 3.45%
China decreased its benchmark one-year loan prime rate, which is primarily used to price mortgages, from 3.55% to 3.45%, but left its five-year counterpart, which is primarily used to price corporate lending, at 4.2%. Both rates were expected to be reduced by 0.15 percentage points, according to economists surveyed by Reuters.
Last week, the central bank stunned the market by lowering the rate at which it loans to some banks under its medium-term lending facility by 0.15 percentage points. This was anticipated to drive down borrowing costs across the economy.
Chinese officials are looking for a balance between attempts to boost the economy and worries about the state of their banks, according to economists Julian Evans-Pritchard and Zichun Huang of the consultancy Capital Economics.
Overall, they concluded that the PBoC's monetary policy strategy is of limited value in the current circumstances and won't be sufficient—on its own, at least—to provide a foundation for growth. It would need far higher rate reductions or regulatory actions to effectively boost demand and rebuild trust in the housing market.
The stresses on the Chinese economy are most noticeable in the real estate market. Evergrande, which is severely indebted, is not the only developer who faces the possibility of missing payments on some of its debt; Country Garden is also in danger of doing the same, affecting the future of real estate developments across China for which several families have already made payments.
George Magnus, an associate at Oxford University's China Centre and the author of several books on China's economy, warned that the instability in the country's real estate market, which accounts for about a quarter of its GDP, could endanger financial stability and cause social issues if developers are unable to deliver pre-sold housing.
He stated on BBC Radio 4's Today show that the market has been supported by the government and official activities over the past 10 or 20 years. When the economy was struggling, borrowing was used to pay for infrastructure and real estate development. As a result, the property market's protection against corrections is finally coming home to roost.
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