China surprise cuts interest rates to boost its economy

The People’s Bank of China (BPC, the central bank) has announced on Tuesday an unexpected cut of 15 basis points in the interest rate of its one-year bank loans, to 2.5%, the largest adjustment since 2020. Beijing is It faces a series of economic challenges, such as a liquidity crisis in the real estate sector, a sharp drop in exports, stagnant foreign investment and weak consumption. Given this situation, the Chinese banking regulator justifies lowering this reference rate to its lowest since 2014 to “maintain reasonable liquidity in the banking system and meet the needs of financial institutions.” This is the second cut that the BPC has undertaken since June and the first under the new governor, Pan Gongsheng, a position in which he took over from Yi Gang after his retirement.

The move comes after the Politburo, China’s top decision-making body, called for new policies to boost domestic demand and prevent risks. The Chinese economy grew only 0.8% quarter-on-quarter in the second four-month period, which represented a slowdown of 1.4 points compared to the data registered in the first three months of the year.

Furthermore, in July, inflation entered negative territory for the first time since February 2021; the dollar-denominated value of exports plummeted 14.5% year-on-year (the biggest drop since the start of the pandemic), while that of imports experienced its biggest decline since January, contracting 12.4% year-on-year.

This Tuesday, the Central Bank has also lowered the short-term interest rate by ten basis points, as part of the government’s efforts to “strengthen the countercyclical adjustment and stabilize market expectations,” according to the state agency Xinhua.

The PBOC also announced the injection of 204,000 million yuan (28,049 million dollars) through seven-day reverse repurchase agreements (also known as ‘repos’, an instrument by which securities are sold conditional on an agreement to repurchase them in a later date) with an interest rate of 1.8%, below the previous 1.9%.

From Capital Economics they consider that this reduction in interest rates “by a higher margin than usual” occurs “amid the growing concern of the authorities for the economic health of the country.” From this London-based consultancy “they take it for granted” that there will be new, broader easing measures, although they emphasize that “monetary stimulus has limited use in the current environment and will not be enough, by itself at least, to consolidate the foundations of growth.

This decision by the Central Bank, which has taken analysts by surprise, occurs on the same day that the National Statistics Office (ONE) of the Asian country has released several macroeconomic data that point to a slowdown in the national economy. Chinese industrial production rose 3.7% in July on a year-on-year basis, while retail sales rose 2.5%, its smallest rise since the end of 2022. Both indicators missed forecasts and came in below figures from June, of 4.4% and 3.1%, respectively. At the same time, the general unemployment rate was 5.3% in the seventh month of the year, compared to 5.2% registered in June.

The ONE has stressed in a statement that, although the Chinese economy continues to recover, “the international political and economic situation is complicated and domestic demand remains insufficient.”

One of the main risks is the real estate sector, as shown by the problems that the developer Country Garden is going through, which has been in the news these days due to the strong correction in its actions. The company has ensured that since 2021 “the sector has entered a period of unprecedented difficulties with multiple unfavorable factors, which has resulted in serious problems for sales and financing in the market.”

In this way, the problems of Country Garden are causing the Chinese brick industry to falter again, barely two years after the beginning of the difficulties of another colossus such as Evergrande. According to data revealed today by the ONE, real estate investment fell by 8.5% year-on-year in the period from January to July, the lowest rate so far this year, after a reduction of 7.9% in the first half. 2023. The real estate industry represents more than a fifth of all investment in fixed assets and contributes around 14% of the economic growth of the Asian giant.

ONE spokesman Fu Linghui tried to downplay the matter, noting that while “the real estate market is undergoing a period of adjustment and it’s going to be challenging to operate in the short term,” “these issues are only temporary as As policies are adjusted, the risks will be minimized.”

In addition, private investment fell by 0.5% in the first seven months of the year (three tenths more than in the first half), compared to the 7.6% increase registered by state companies.

stop publishing data

On the other hand, China has suspended the publication of the urban youth unemployment rate since this month of August, due to “economic and social changes that require improvement and optimization of labor statistics.” In recent months, this indicator set records above 20% and, in June (the latest available) it stood at 21.3%. International analysts point out that this exclusion will complicate the analysis of the country’s economic data, which had become more difficult in recent years.

However, spokesman Fu Linghui explained that the decision comes from the increase in the number of students in Chinese cities, which raises questions about whether they should be “included or not” in employment surveys. According to official data, in 2022 there were more than 96 million urban youth between the ages of 16 and 24, of whom more than 65 million were students.

“Students’ main task is to study, and there are different opinions on whether job seekers before graduation should be considered as part of the labor force,” the ONE spokesperson said, according to China National Radio.

Likewise, the Office indicated that, with the increase in the educational level of residents, young people extend their study time, which also “raises the need to review the age range to define this group”, until now included in a age range between 16 and 24 years.

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