China Faces Risk of Low Growth and High Inflation... Targeted Real Estate Stimulus

Economic Growth Rate Hits Second Lowest at 0.4%, Consumer Prices Highest in 2 Years
Inflation Concerns Lead to Cautious Interest Rate Policy... Only 5-Year LPR Expected to Be Cut

[Asia Economy Senior Reporter Cho Young-shin] As China's consumer price inflation rate hits a two-year high, the Chinese monetary authorities are facing increasing concerns. While interest rate cuts are needed to stimulate the economy for growth, they could further fuel inflation. Some in China are worried that the Chinese economy might fall into a trap of 'low growth' and 'high inflation.'

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The People's Bank of China (PBOC), the country's central bank, stated on the 11th in its 'Monetary Policy Implementation Report' that structural inflationary pressures on the Chinese economy may increase. The PBOC expressed concerns that the Consumer Price Index (CPI) could exceed the government's target in some months.

Within China, it is estimated that the monthly CPI for September and December will surpass the government's target of 'within 3%.'

◆ The World's Factory China Faces Low Growth and High Inflation Crisis = China's Gross Domestic Product (GDP) for the second quarter (April to June) was 29.2464 trillion yuan (approximately 565.8 trillion KRW), marking only a 0.4% increase compared to the same period last year. This is the lowest level since the first quarter of 2020 (-6.9%), which fell into negative territory immediately after the Wuhan COVID-19 outbreak. The full lockdown of Shanghai in April and May, along with partial controls in major cities such as Beijing and Shenzhen, dealt a blow to the economy. Although the zero-COVID policy has been partially eased, the prevailing view is that achieving this year's growth target of 'around 5.5%' is virtually impossible.

Moreover, inflation is also becoming serious. Last month, China's CPI rose 2.7% year-on-year, the highest since July 2020. This is close to the Chinese authorities' management target. Since recording 0.9% in January and February, China's CPI has shown a monthly upward trend: 1.5% in March, 2.1% in April, 2.1% in May, and 2.5% in June. The increase was mainly driven by food items and energy-related products such as gasoline.

Inflation directly affects public sentiment. If public dissatisfaction arises ahead of the 20th National Congress scheduled for November, it could negatively impact President Xi Jinping's bid for a third term. Since China's inflation also influences global prices, major economic forecasting institutions are closely monitoring China's inflation.

◆ Complex Chinese Monetary Authorities = China's benchmark lending prime rate (LPR) has remained unchanged for six months. The PBOC cut the one-year LPR twice in December last year and January this year. In May, the PBOC cautiously lowered only the five-year LPR, which affects the real estate market, by 0.15 percentage points. Instead, it is pursuing economic stimulus through fiscal policy, a monetary policy approach aimed at curbing inflation.

Chinese Premier Li Keqiang also emphasized at the World Economic Forum (WEF) in July that "growth can be low if employment is sufficient and prices are stable," placing more weight on inflation and employment than on growth.

However, the side effects of economic stimulus through fiscal policy cannot be overlooked. The issuance of special bonds and local government finances could later hamper the Chinese economy.

◆ Targeted Interest Rate Cuts to Stimulate Real Estate = Chinese economic media Caijing cited the PBOC report, highlighting the need to be cautious about structural inflationary pressures such as imported inflation. It emphasized the need to closely watch the possibility that consumption recovery following COVID-19 management could transmit to producer prices, that rising prices of energy products like oil?on which China heavily depends on imports?could push up prices in related industries such as tourism, and that food price increases due to pork price normalization are inevitable.

Despite persistent inflationary factors, Chinese economic experts generally agree that the government’s original goal of managing inflation around 3% is achievable.

Won Bin, Chief Economist at Minsheng Bank, forecasted, "While the CPI is likely to exceed 3% in September and December, it will remain within the policy target on an annual basis." He added that due to weakening momentum in international raw material price increases and base effects, the Producer Price Index (PPI) will continue to decline, meaning that CPI and PPI will not exert significant pressure on monetary policy.

Caijing, however, predicted that the monetary authorities might further cut the five-year LPR to revive the sluggish real estate market.

This content was produced with the assistance of AI translation services.