BANGKOK – China's leaders launched a flurry of new policy measures this week to shore up faltering financial markets and boost growth in the world's second-largest economy.
Efforts to support lending and spending with billions of dollars in fresh cash gained momentum as the central bank cut banks' reserve requirements and issued new rules to encourage banks to lend more to real estate companies.
The collapse of China's real estate market was one of the key factors hindering the country's recovery from the shocks of the COVID-19 pandemic. What is at stake: stable financial markets and an important driver of global economic growth.
How is the Chinese economy doing?
China's economy grew 5.2% annually in 2023, exceeding the government's target, and many indicators, including factory output and retail sales, show signs of improvement. But most economists are predicting a slowdown this year and next that will curb global growth. Meanwhile, Chinese stock markets have been swooning since late 2023, exacerbating losses that have reached trillions of dollars in recent years. A housing downturn, job losses and other stresses from the COVID-19 pandemic have left consumers cautious about spending. Some economists say this could become a deflationary spiral as prices for real estate and other goods fall, discouraging investments that would create jobs and fuel a stronger recovery.
WHY ARE CHINA’S LEADERS ACTING NOW?
The weakening economy and crackdown on the tech industry, as well as disruptions during the pandemic and trade tensions with the United States, have left foreign investors worried about business prospects in China. Premier Li Qiang chaired a State Council or Cabinet meeting this week where he said more needed to be done to “stabilize the market and boost confidence.” Speaking at the World Economic Forum in Davos, Switzerland, last week, he tried to sell investments in China as “not a risk, but an opportunity.”
A key priority is ensuring that growth is fast enough to create enough jobs for young workers leaving school. The unemployment rate among young Chinese rose to a record high of over 21% in 2023. It has since fallen to around 15% but still remains dangerously high, increasing the urgency of getting growth back on track.
WHAT IS THE GOVERNMENT DOING?
The central bank will reduce the share of reserves it holds on behalf of banks by 0.5 percentage points from February 5. People's Bank of China Governor Pan Gongsheng said this would free up 1 trillion yuan ($140 billion) in additional funds. The PBOC also cut the interest rates banks charge each other and issued new rules intended to expand real estate developers' access to commercial bank loans. Until the end of the year, real estate companies will be allowed to use bank loans pledged on commercial properties such as offices and shopping centers to repay their other loans and bonds. Regulators previously cut mortgage rates and lifted restrictions on home purchases. After stock prices collapsed, government institutional investors were reportedly encouraged to buy shares.
WHY IS THE REAL ESTATE 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 company, China Evergrande, is still trying to pay off more than $300 billion in debts and a Hong Kong court is scheduled to hold a hearing on its restructuring plans next week.
It is unclear what impact the new guidelines could have on the general crisis in the real estate market. Land sales have long been an important source of revenue for local governments, which are now also heavily indebted. At the same time, the stalled construction of new homes is impacting contractors and suppliers of building materials and furnishings. This has destroyed countless jobs and impacted the economy. New home sales and property prices have fallen, discouraging consumers from buying as Chinese families tend to put much of their wealth into real estate. The industry as a whole accounts for more than a quarter of business activity in China.
What impact will the measures taken so far have on the ordinary population?
As China's rapid rise as an economic superpower loses momentum, foreign investors and consumers are watching for signs that Beijing has a clear plan to steer the economy through an era of slower growth.
Measures to pump more money into the economy and encourage bank lending may not go far enough, many analysts said. Reducing required bank reserves frees up more credit, but “it doesn’t address the root problem; Therefore, you can lead a horse to water, but you cannot make it drink,” Stephen Innes of SPI Asset Management said in a report. Economists tend to agree that longer-term reforms are needed to sustain strong growth, such as creating a better social safety net that allows families to spend money instead of putting their savings in banks for a rainy day. Too much of the country's wealth still goes to building infrastructure like roads and railways, and uncertainty over policy has discouraged investment in the small, private companies that create most jobs.
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