Beijing's Struggle to Combat Economic Slowdown Persists
Despite intensified efforts by Chinese authorities to stimulate growth, the persistently disappointing data suggests that Beijing's attempts may fall short in addressing the ailing economy
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This week, Chinese authorities have escalated their efforts to stimulate economic growth, but it remains uncertain whether these measures will be effective in addressing the country's struggling economy.
The country's central bank injected a significant amount of liquidity into the banking system on Friday, as part of a larger effort to bolster the economy. This comes as the economy has been facing challenges from a sluggish property market and weak consumer demand.
Following this action, Hong Kong stocks saw an increase, however, government data released on the same day indicated that the world's second-largest economy is still experiencing difficulties, with disappointing investment in fixed assets.
There were some areas that saw improvement. The National Bureau of Statistics (NBS) reported a 6.6% increase in output from China's industrial sectors last month compared to the same period in 2022, surpassing the Reuters poll forecast of 5.6% growth. Additionally, retail sales, an indicator of consumer spending, increased by 10.1% in November, higher than the 7.6% reported the previous month.
The most recent figure showed a lower than expected 12.5% expansion, in comparison to a Reuters forecast. This figure was calculated against a low base of comparison in 2022 when Covid-19 curbs discouraged spending. Investment in fixed assets, including buildings and roads, increased by 2.9% in the first 11 months of the year, slightly lower than the forecasted 3.0% expansion.
Real estate development saw a 9.4% year-on-year decrease in fixed asset investment during the first 11 months of this year, as reported by NBS data. According to a research note from Julian Evans-Pritchard of Capital Economics, the decline in private investment is primarily centered on real estate and indicates more deep-rooted issues than just a lack of confidence.
China's economic woes are largely attributed to the downturn in its real estate sector. This industry, once a significant contributor to the country's GDP, has been in crisis since the government imposed strict regulations on developers' borrowing practices three years ago. As a result, home sales have sharply declined and developers are facing financial difficulties. The property market slump has also had a negative impact on consumer spending and has led to concerns about deflation due to weak prices throughout the year.
Loosening the rules
Beijing is taking steps to ward off a slowdown.
Earlier this week, China's senior leadership pledged to prioritize economic growth in 2024 at the annual Central Economic Work Conference, which is closely monitored and sets the economic policy tone for the year ahead.
On Friday, the People's Bank of China announced plans to keep the interest rate steady on 1.45 trillion yuan ($204 billion) in one-year medium-term lending facility (MLF) loans in order to ensure "reasonable and ample liquidity."
650 billion yuan worth of MLF loans set to expire this month, resulting in a net addition of 800 billion yuan worth of fresh funds into the banking system. This marks the biggest monthly increase on record. In addition, Beijing and Shanghai have relaxed rules on property purchases to further support the struggling industry, lowering the minimum deposit ratio for first and second homes.
The Beijing Municipal Commission of Housing and Urban-Renewal Development announced on Thursday that the minimum down payment deposit ratio for first homes will be lowered to 30%, down from the previous range of 35% to 40%. Additionally, the minimum deposit for second homes will be reduced to 40% or 50%, depending on location, as compared to the previous 60% or 80%. This is according to Reuters.
Shanghai, the commercial capital, has announced a reduction in down payment requirements for both first and second-home buyers to 30% and 50%, respectively, as reported by CCTV. This marks a decrease from the previous ratios of 35% to 70%, as stated by state media. Larry Hu, chief China economist at Macquarie Group, has commented to CNN that these relaxed rules are expected to stimulate activity and improve confidence in the property market.
He suggested that simply addressing the most important issue in China's housing market - the credit risk for developers - might not be enough. He added that the ultimate solution may still depend on the central government, which could establish a lender or buyer of last resort for troubled property developers, similar to the Troubled Asset Relief Program (TARP) implemented by the US Treasury during the global financial crisis.
TARP, passed in 2008 after the Lehman Brothers' bankruptcy, was a response to the imminent collapse of the nation's financial system and the fear of another Great Depression. Reporting contributions by CNN's Diksha Madhok and Wayne Chang.
