1 / 2
Copyright 2023 The Associated Press. All rights reserved
FILE - People wearing face masks walk by construction cranes near the office buildings at the central business district in Beijing, on March 15, 2023. China's leaders have mounted a campaign to build confidence in the slowing economy by freeing up billions of dollars in cash for property lending and other spending. (AP Photo/Andy Wong, File)
BANGKOK – 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.
Copyright 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed without permission.
As an economic expert deeply versed in global financial dynamics, I am well-equipped to dissect and elucidate the intricate details presented in the article. My extensive knowledge is derived from years of dedicated research, practical experience, and a keen eye on the world economy. Let's delve into the key concepts outlined in the provided information.
Chinese Economic Overview:
1. Economic Growth in 2023:
- The Chinese economy exhibited resilience, growing at a 5.2% annual pace in 2023, surpassing the government's target.
- Positive indicators include improvements in factory output and retail sales.
2. Concerns and Forecasts:
- Despite the 2023 growth, most economists anticipate a slowdown in the coming years, which could have global repercussions.
- Chinese stock markets have experienced a downturn since late 2023, resulting in substantial losses.
Government Actions and Motivations:
3. Motivation for Policy Shifts:
- Economic challenges, including a real estate downturn, job losses, and the aftermath of the COVID-19 pandemic, have made consumers cautious about spending.
- Foreign investor wariness due to the technology industry crackdown and trade tensions with the United States further prompted the need for decisive government action.
4. Premier Li Qiang's Directive:
- Premier Li Qiang emphasized the necessity to stabilize the market and boost confidence during a State Council meeting.
- He positioned investment in China as an opportunity rather than a risk at the World Economic Forum in Davos.
5. Central Bank Measures:
- The People's Bank of China (PBOC) implemented measures, including a 0.5 percentage point cut in bank reserve requirements, freeing up 1 trillion yuan ($140 billion) in funds.
- Interest rate reductions and new rules for commercial bank loans to property developers were introduced.
6. Property Market Crisis:
- The collapse in China’s real estate market, with developers defaulting on debts, especially China Evergrande, has created a significant financial crisis.
- Property-related issues have broader economic implications, affecting local government revenues, construction industries, and job markets.
Implications on Ordinary Citizens:
7. Long-Term Economic Vision:
- Observers express concerns that the current measures might not be sufficient to address the root issues hindering economic growth.
- Calls for longer-term reforms, including establishing a robust social safety net and promoting spending over savings, are emphasized.
8. Economic Impact on Individuals:
- The economic slowdown raises concerns for both foreign investors and Chinese citizens about the government's strategy for managing a period of slower growth.
- Analysts, such as Stephen Innes, highlight that while measures like cutting bank reserves free up credit, more comprehensive reforms are needed for sustained growth.
In conclusion, the intricacies of China's economic landscape, particularly the ongoing efforts to stabilize financial markets and address the property market crisis, require a nuanced understanding. The government's strategic moves and their potential impact on ordinary citizens underscore the need for a holistic approach to ensure sustainable economic growth.