China Driving Future Consumption... Will Consumption Rebound? (Comprehensive 1)

China's Real Estate Also Indestructible... 5-Year LPR Cut by 0.15%P
1-Year LPR Lowered to Boost Consumption, Concerns Over Inflation Rise

[Asia Economy Senior Reporter Cho Young-shin] China, where a red light has turned on for economic growth, has lowered the Loan Prime Rate (LPR), which is equivalent to the benchmark interest rate. Chinese financial authorities have so far focused more on fiscal policy than monetary policy. It appears they have acknowledged that the Chinese economy is in a precarious state.

[Image source=Yonhap News]

The People's Bank of China, the central bank, announced on the 22nd that it lowered the 1-year LPR by 0.05 percentage points and the 5-year LPR by 0.15 percentage points.

Accordingly, the 1-year LPR dropped from the previous 3.70% per annum to 3.65%, and the 5-year LPR fell from 4.45% per annum to 4.30%. The 1-year LPR cut is the first in seven months since January, and the 5-year LPR cut is the first in three months since May.

The LPR is a figure compiled from the loan rates offered to the best customers by 10 designated banks and effectively serves as the benchmark interest rate in China.

Earlier, on the 15th, the People's Bank of China hinted at a rate cut by lowering the 1-year Medium-term Lending Facility (MLF) rate and the 7-day reverse repurchase agreement rate by 0.1 percentage points each.

◆ Shaking Chinese Economy

According to data released by the National Bureau of Statistics of China, industrial production in China last month increased by only 3.8% compared to the same period last year. This is lower than both market expectations (around 4.5%) and the June growth rate (3.9%).

China's industrial production recorded a negative 2.9% in April when the Shanghai lockdown was in full effect, rebounded to 0.7% in May and 3.9% in June, but turned downward again in July.

Retail sales, a gauge of domestic demand, also fell far short of market expectations (around 5%). Last month, China's retail sales increased by only 2.7% year-on-year. Consumption, which started to decline due to the Shanghai lockdown, has yet to recover. Domestic demand accounts for more than 60% of China's Gross Domestic Product (GDP). Without domestic demand, there is no growth.

This recent cut in the 1-year LPR was implemented to stimulate domestic demand. The 1-year LPR serves as a benchmark for credit and corporate loans and has a broad impact.

However, it is uncertain whether this 1-year LPR cut will lead to increased consumption. The ongoing lockdowns and control policies due to the resurgence of COVID-19 and whether a 0.05 percentage point rate cut can revive consumer sentiment that has already been dampened remain questionable.

Moreover, there is concern about pulling future consumption forward through rate cuts. There is already no shortage of funds in the market, as deposits have increased. There are also many negative views that the 1-year LPR cut will only stimulate inflation.

Photo by Shinhwa Toin Capture

◆ Even China’s Real Estate is “Too Big to Fail” (?)

As the July industrial production and retail sales statistics were released, voices calling for easing real estate market regulations erupted across China. Since real estate is making an already difficult economic situation worse, there is a need for party-level real estate policies.

In fact, the cumulative growth rate of real estate development investment in China until last month recorded a negative 6.4%. Also, the prices of new homes in 70 small and medium-sized cities in China fell by as much as 0.9% year-on-year last month, marking the largest decline since September 2015.

Yan Weijin, head of research and development (R&D) at Shanghai E-House China, said, "The Chinese real estate market is cooling down," and added, "More proactive real estate policies nationwide are urgently needed to promote market recovery."

Within China, after the People's Bank of China cut the MLF rate on the 15th, there was speculation that there was room to cut the LPR rate, especially the 5-year LPR. The 5-year LPR cut is interpreted as an indirect or direct signal from the party and government that they will ease real estate market regulations.

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