China Cuts Lending Rates to Counter Deepening Economic Slowdown

China keeps slashing lending rates for the second consecutive month as the
government in the latest move to ramp up its efforts to prevent a sharp economic
slowdown. The People’s Bank of China on 20 January cuts its one-year loan prime rate
by 10 basis points to 3.7 per cent, the second cut to the rate in a month. December’s
cut was the first time the central bank touched the benchmark lending rate since April
2020, when China was in the throes of the initial coronavirus. The central bank also
trimmed its five-year loan prime rate by five basis points to 4.6 per cent, the first cut
to that rate since April 2020.
The central bank’s decision to cut both rates is the latest in a series of steps that China
has taken to loosen monetary policy, as authorities contend with a deepening slump
in the real estate market and slowing economic growth. China’s GDP expanded 8.1
per cent in 2021, according to government figures published earlier this week, but
the pace slumped in the final quarter. China’s GDP expanded just 4 per cent in the last
quarter of the year compared to a year prior, the slowest pace in a year and a half. The
world’s second-biggest economy may struggle to grow much faster than that through

  1. Consumption dramatically weakened amid renewed COVID-related
    disruptions, such as the massive outbreaks in several provinces that led to close
    entertainment venues, shut down factories, and put thousands of people in
    Economists expect the country could struggle even more this year, as the world’s
    second-largest economy tries to stave off coronavirus outbreaks with its strict zero COVID policy and as the property crisis continues to fester. Averting a collapse of
    China’s real estate sector is of particular concern in China. The industry crunch began
    more than a year ago when Beijing started cracking down on excessive borrowing by
    developers, a move intended to rein in their high leverage and curb runaway housing
    prices. But the problem escalated significantly last fall as Evergrande, China’s most
    indebted developer with some $300 billion in liabilities, began warning more
    urgently of liquidity problems.
    Analysts have long been concerned that a collapse could trigger wider risks for
    China’s property market, hurting homeowners and the broader financial system.
    Even so, the latest measures are not sufficient to boost the economy, according to
    analysts. The real drags on China’s economy are the rising costs of China’s zero-COVID
    strategy to contain waves of coronavirus, slowing export growth and the worsening
    property sector, analysts believe. The no-tolerance strategy to containing the
    coronavirus has resulted in stringent lockdowns and severe isolation. Policymakers
    face other constraints, too, such as a significant amount of hidden debt held by local
    governments. If credit is allowed to expand too much, that could lead local
    governments to borrow even more, exacerbating their debt problems.
    China’s Zero-COVID Policy Serious Problem for Economy
    Economists have warned that China’s zero-Covid approach to containing the virus
    could spell serious problems for the economy in 2022. Beijing’s unwavering
    insistence on stamping out any trace of the coronavirus, meanwhile, is facing a huge
    test as authorities grapple with stubborn outbreaks and lockdown large swaths of the
    population to contain them.
    Meanwhile, Goldman Sachs slashed its projection for Chinese economic growth in
    2022 to 4.3 per cent from 4.8 per cent, just over half of last year’s figure. They expect
    consumption to be worst hit as a result of the strict COVID curbs. December’s weak
    retail sales data is already showing evidence of how disruptive the coronavirus is
    becoming in China.

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