(Beijing) To revive growth, China is counting on more real estate loans: the central bank lowered a reference rate on Tuesday, in the hope of stimulating a key but seized engine of the world’s second largest economy.
Real estate, which has experienced two decades of meteoric growth in the country with the rise in the population’s standard of living, has long represented in the broad sense more than a quarter of China’s GDP.
But the sector is now under pressure, with some developers on the verge of bankruptcy, unfinished housing and falling prices deterring the Chinese from investing in real estate, all against a backdrop of economic slowdown.
To try to stimulate activity, the Central Bank on Tuesday reduced a key benchmark rate for property loans.
The five-year LPR rate is lowered from 4.2% to 3.95%. This is the biggest cut in this rate, which is now at its historic low.
It had already been lowered in June.
This decision, anticipated by the markets, is supposed to encourage commercial banks to grant more credit and at more advantageous rates.
The measure should indirectly support activity in a context of economic slowdown.
“Urgency to act”
This decision is “a step in the right direction” to revive activity, believes economist Zhiwei Zhang, of asset manager Pinpoint Asset Management.
It is contrary to the main economies in the world which are raising rates to curb inflation.
The one-year LPR, which constitutes the benchmark for the most advantageous rates that banks can offer to businesses and households, is however unchanged at 3.45%, the central bank said.
This decision comes after a succession of mixed indicators for the world’s second largest economy.
Last year, China recorded one of the lowest growth rates in three decades (5.2%), according to an official figure that many economists consider overestimated.
High youth unemployment and economic uncertainty are also a major brake on spending in the country, weighing on the operation of thousands of factories and impacting employment.
Geopolitical tensions are also hampering demand for Chinese products and penalizing exports, another pillar of the economy.
“Political decision-makers recognize the urgency of acting quickly” for the economy, according to Mr. Zhang, and noted that the drop in the LPR was much greater than anticipated by the markets.
But it “will probably have a limited effect”, nuance analyst Ting Lu, of the Nomura bank.
According to him, the authorities will have to “do much more to save” unfinished projects and “stabilize” the real estate sector.
Falling prices
China has several times announced measures to save its real estate sector, but the results have so far had little effect.
In December, China’s major cities again recorded a month-on-month decline in property prices, according to official figures.
Out of 70 cities which make up the official reference indicator, 62 were thus concerned (compared to 33 in January 2023, a sign of deterioration of the situation).
Figures for the month of January will be published on Friday.
To stimulate activity, the central bank had already lowered the mandatory reserve rate (RRR) at the beginning of the month.
This ratio is the share of deposits that commercial banks are required to keep in their coffers.
Any drop is supposed to encourage banking establishments to grant more loans.
Chinese stock markets have generally been on a downward trend for many months, due to the economic situation. But the drop in the LPR has brought a slight wind of optimism.
Shanghai closed up 0.42%, while Shenzhen gained 0.52%.