And while China’s central bank cut interest on short-term loans for the first time in 10 months, in a bid to restore market confidence and support the faltering recovery from the Corona outbreak in the second-largest world economy, this reduction indicates that policymakers are increasingly concerned about the strength of the recovery in China after the abolition of restrictions. This step also reflects “the possibility of taking urgent stimulus measures to support growth in the period ahead”.
Following the interest rate cut, the government released credit growth figures for May, which analysts said came in well below expectations as weakness in the property sector hit consumer confidence. consumers, according to a report published by the British newspaper Financial Times. indicates that:
China’s economy rebounded in the first quarter after tough coronavirus controls were lifted, but it has begun to falter in recent weeks as export growth slows and its property sector struggles to emerge from a prolonged slump. The government sought to remedy the situation by lowering the seven-day repo rate by 10 basis points to 1.90% from 2.00%, and injecting 2 billion yuan ($279.97 million ) through the short-term bond instrument, in order to “maintain reasonably adequate liquidity in the banking system”. This was the first cut in 9 months of the rate, which fixes the cost of loans for seven days, by the bank The lower interest rate reduces the cost of short-term loans and improves the liquidity of the Chinese financial system.
China continues to antagonize global central banks as it pursues accommodative monetary policies to support growth while its major peers raise interest rates to rein in rising consumer prices.
On Tuesday, the government announced 22 cost-cutting measures for businesses this year, including tax breaks as well as measures to direct lending to certain sectors.
Boosting export growth
In an exclusive statement to Sky News Arabia Economy, writer and economic analyst, Western University economics professor Michael Parkin, outlines the implications of this sudden reduction, and whether it indicates any further moves in the economy. ‘coming.
He says the PBOC’s cut in the seven-day repo rate by 10 basis points to 1.9% is a (small) cut, but contains clues to the PBOC’s future directions.
He added: “This devaluation indicates that the People’s Bank of China is somewhat satisfied with current inflation rates and future expectations, and wishes to lower the yuan, stimulate export growth and support increased production.
In this context, the aforementioned “Financial Times” report quotes analysts who said that the reduction in the reverse repurchase rate could portend reductions in other interest rates of the People’s Bank of China, including the rate of the medium-term loan facility and the base interest rate for loans. .
“We expect more policy easing to be announced,” Goldman Sachs said in a note. “If the government wants to stimulate a recovery in loan demand, it will need more aggressive rate cuts,” said Julian Evans-Pritchard, head of China’s economy. at Capital Economics, Julian Evans-Pritchard. .
More substantial measures could include providing developers with additional help to complete unfinished property projects, analysts say, especially as many developers lack the funds to complete projects after a long crisis.
The real estate sector
While the performance of the Chinese economy exceeded expectations in the first three months of this year 2023, after the GDP grew by 4.5%; Benefiting from the closing of the curtain on the “zero Covid” policy, which has contributed to the acceleration of economic activity, and with the boom in exports and retail sales, the last few weeks have however seen signs of trends emerging. relatively different that cast doubt on the possibility of continuing the “rapid recovery”.
Chief among them is the weak performance of the real estate sector, with sales falling to 63% from 2019 levels in April, from 95% in March, according to data from research firm Gavekal. The real estate crisis has spread to industrial production, which fell in April compared to seasonally adjusted 2019 data, due to lower demand for cement, glass and other raw materials. Consumption household prices, one of the main expected drivers of the recovery, has also run out of steam. Home sales, industrial production rates and credit growth rates fell short of previous expectations in April and early May, which could help reduce growth opportunities as expected.
In this context, Tariq Al-Rifai, CEO of the “Quorum” Center for Strategic Studies, said in exclusive statements to “Economy Sky News Arabia” that this “sudden” drop in interest rates is an attempt by the Chinese government to support the Chinese economy, in particular the real estate sector, on the basis that the Chinese economy is largely linked, at more than 20%, to this sector.
He adds: “The slow growth of the real estate sector in recent years has prompted China to try to support the sector, and three years ago we saw the collapse of more than one real estate company due to high speculation. in the sector, and then the consequences of rising interest after that, until the Chinese bank began to cut back, in an effort to restore support to the sector.
The CEO of the Center for Strategic Studies “Quorum” points out that the Chinese economy suffers from two main problems:
First problem: the high debt ratio, for the private sector and the public sector, at high levels, and this affects the whole economy. Second problem: the continuous slowdown that the Chinese economy has been facing for years, which is causing widespread fears on the part of the government, in the context of efforts to resist this trend and restore growth momentum.
Revitalize the economy
For his part, international relations and political economy researcher Abu Bakr El-Deeb points out that the Chinese central bank’s sudden decision to cut short-term interest for the first time since August 2022 stemmed from a number of main reasons; Most important is the bank’s realization that interest rates need to be cut in order to stimulate activity in the arteries of the Chinese economy after a wave of stagnation and weakness, expecting Further interest rate cuts come after this decision.
He explains that one of the reasons for the decision is also the desire of monetary policymakers in China to facilitate medium-term lending, especially since this drop is the first in ten months and after the economic recovery. lost further momentum with manufacturing and investment weakness.
He points out that the bank injected liquidity into the financial system through open market operations, after announcing that it had carried out reverse repurchase transactions worth two billion yuan for seven days. (approximately US$280 million) at an interest rate of 1.9%, in order to maintain reasonable and abundant liquidity in the country’s banking system.
Reverse repurchase transactions known as “reverse repos” are transactions in which the central bank buys securities from commercial banks through tenders with an agreement to resell them in the future.
Al-Deeb confirms that the interest rate cut, which aims to support the shaky recovery from the Corona pandemic in the world’s second largest economy and largest oil importer, is likely to increase oil demand , pointing out that last May, economic activity data showed a slowdown in the recovery. The Chinese economy increased the need for monetary easing after industrial production, retail sales and asset investment Fixed income rose at a much slower pace than expected in April, while inflation fell to near zero.
It is believed that the Bank of China will accelerate – in the light of these indications – the continuation of the monetary policy easing until the beginning of the year 2024 thanks to further cuts in interest rates.
Barclays plans to cut interest rates by 10 basis points per quarter in China, starting in the third quarter of this year 2023 until the first quarter of 2024.
Read the Latest World News Today on The Eastern Herald.
