BANGKOK (AP) — China’s leaders launched a barrage of new policies this week to prop up languishing financial markets and rekindle growth in the world’s second-largest economy.
The moves to support lending and spending with billions of dollars of fresh cash gathered pace when the central bank cut bank reserve requirements and issued new rules to encourage banks to lend more to property companies.
A collapse in China’s real estate market has been one of the key factors hindering the country’s recovery from the shocks of the COVID-19 pandemic. What’s at stake: stable financial markets and a major driver of global economic growth.
HOW IS THE CHINESE ECONOMY DOING?
The Chinese economy grew at a 5.2% annual pace in 2023, exceeding the government’s target, and many indicators including factory output and retail sales show signs of improvement. But most economists are forecasting a slowdown this year and next that will drag on global growth. Meanwhile, Chinese stock markets have swooned since late 2023, deepening losses that amount to trillions of dollars over the past several years. A real estate downturn, job losses and other trials of the COVID-19 pandemic have left consumers cautious about spending. That threatens to become what some economists say could be a deflationary spiral as prices for housing and other goods fall, discouraging investment that would create jobs and spur a stronger recovery.
WHY ARE CHINA’S LEADERS ACTING NOW?
The weakening economy and crackdowns on the technology industry, along with disruptions during the pandemic and trade tensions with the United States, have left foreign investors wary about the business outlook in China. Premier Li Qiang chaired a meeting of the State Council, or Cabinet, this week where he said more has to be done to “stabilize the market and boost confidence.” Last week, speaking at the World Economic Forum in Davos, Switzerland, he sought to sell investment in China as “not a risk, but an opportunity.”
A vital priority is ensuring growth is fast enough to generate ample jobs for young workers as they leave school. The rate of unemployment among young Chinese surged in 2023 to a record of over 21%. It’s fallen since to about 15% but still remains perilously high, adding to the urgency to get growth back on track.
WHAT IS THE GOVERNMENT DOING?
The central bank will cut the ratio of reserves it holds on behalf of banks by 0.5 percentage points as of Feb. 5. People’s Bank of China Gov. Pan Gongsheng said that would free up an extra 1 trillion yuan ($140 billion) in funds. The PBOC also reduced the interest rate banks charge each other and issued new rules meant to expand access to commercial bank loans for property developers. Until the year’s end, real estate companies will be allowed to use bank loans pledged against commercial properties such as offices and shopping malls to repay their other loans and bonds. Earlier, regulators cut mortgage rates and lifted curbs on property buying. After share prices tumbled, state-owned institutional investors reportedly were ordered to buy shares.
WHY IS THE PROPERTY CRISIS SUCH A BIG PROBLEM?
Dozens of developers defaulted on their debts after the government cracked down on excessive borrowing in the industry several years ago. The largest, China Evergrande, is still trying to resolve more than $300 billion in debts and a Hong Kong court is due to hold a hearing on its restructuring plans next week.
It’s unclear what impact the new policies might have on the overall crisis gripping the property market. Land sales have long been a major revenue source for local governments that also are now heavily in debt. At the same time, stalled construction of new homes has hit contractors and suppliers of construction materials and home furnishings. That has wiped out untold numbers of jobs, rippling through the economy. Sales of new homes and home prices have been falling, discouraging consumers from spending since Chinese families tend to have much of their wealth tied up in property. The industry as a whole accounts for more than a quarter of business activity in China.
HOW WILL THE MEASURES TAKEN SO FAR AFFECT ORDINARY FOLKS?
As China’s rapid rise as an economic superpower loses momentum, foreign investors and consumers are watching for signs that Beijing has a clear game plan for navigating the economy through an era of slower growth.
The moves to put more money into the economy and encourage bank lending might not go far enough, many analysts said. The cut in required bank reserves frees up more credit, but “it doesn’t tackle the root issue; hence you can lead a horse to water, but you cannot make him drink,” Stephen Innes of SPI Asset Management said in a report. Economists tend to concur that longer-term reforms, such as creating a better social safety net to enable families to spend rather than stashing their rainy day savings in banks, are needed to sustain strong growth. Too much of the nation’s wealth still goes into construction of infrastructure such as roads and railways, and uncertainty over policies has discouraged investment in small, private businesses that create the most jobs.
As an economic expert deeply versed in the intricate dynamics of global financial markets and China's economic landscape, I can provide valuable insights into the recent developments outlined in the article. My extensive understanding of economic principles, policy interventions, and market trends allows me to analyze the situation comprehensively.
Firstly, the article discusses China's recent efforts to revitalize its financial markets and stimulate economic growth. This involves injecting substantial amounts of fresh cash into the economy through a series of policy measures. Notably, the central bank's decision to cut bank reserve requirements is a crucial move. This will increase liquidity by freeing up funds for lending, providing a much-needed boost to various sectors, especially the beleaguered real estate market.
The Chinese economy exhibited growth, surpassing the government's target with a 5.2% annual pace in 2023. However, concerns loom over a projected slowdown, exacerbated by factors such as a downturn in the real estate market, job losses, and the aftermath of the COVID-19 pandemic. The plummeting Chinese stock markets since late 2023 have added to these challenges, prompting decisive action from the government to stabilize the situation.
Premier Li Qiang's acknowledgment of the need to "stabilize the market and boost confidence" reflects the gravity of the situation. External factors like crackdowns on the technology industry, pandemic disruptions, and trade tensions with the United States have left foreign investors apprehensive. Reassuring investors and fostering confidence in the business outlook are pivotal to ensuring sustained economic growth.
The article outlines specific measures taken by the government, including a reduction in the reserve ratio held by the central bank on behalf of banks and the lowering of interest rates. These actions aim to inject liquidity and encourage lending, particularly to property developers. The government's commitment is further demonstrated by allowing real estate companies to use commercial properties as collateral for bank loans until the year's end.
The focus on the property market crisis is paramount, given the numerous defaults by developers and the massive debts facing companies like China Evergrande. The interconnectedness of the real estate industry with local government revenues, employment, and the broader economy underscores the urgency of addressing this issue.
Despite these interventions, concerns remain about the efficacy of short-term measures. Analysts, such as Stephen Innes of SPI Asset Management, highlight that while freeing up credit is essential, addressing the root issues is crucial for sustainable growth. The article emphasizes the need for longer-term reforms, including the creation of a robust social safety net and encouraging investment in small, private businesses to generate jobs.
In conclusion, the recent developments in China's economic policies reflect a complex interplay of internal and external challenges. The government's actions demonstrate a commitment to stabilizing financial markets, addressing the property crisis, and ensuring sustainable economic growth. However, the effectiveness of these measures and the necessity for deeper structural reforms will shape the trajectory of China's economic future.
