China's attempt to revive its slow economy

Image from BBC

It is a well-known fact that COVID-19 had a major impact on China’s economy. This global event, which affected not just China but the entire world, continued to influence the country’s economy even five years later. Although China’s economy has recovered since the downturn in 2020—when COVID-19 was at its peak—economic growth remained slow due to decreased consumer demand, falling exports, and a struggling real estate market. The largest real estate developers in China, Evergrande and Country Garden, faced significant debt problems as a result of the economic hit. This slowdown had a discernible impact on China’s economy and on consumer confidence in the property market. Unemployment also rose sharply; in June 2023, the rate for individuals aged 16 to 24 reached 21.3% (The Los Angeles Times). This record-high youth unemployment was driven by the sluggish economy and a mismatch between graduates’ skills and available job opportunities. In addition, these challenges contributed to the weakening of China’s yuan.

The growing tensions between the U.S. and China in the trade and export sectors have contributed to China’s weakening economy. If you’d like to learn more, you can read my latest article, which briefly touches on the trade battle between the two countries. With all this in mind, there are rising concerns about deflation, which signals that demand in China’s economy may grow even weaker.

Before we get further into this, you guys have to know what the loan prime rate (LPR) is. The LPR was officially introduced in China on August 20, 2019, in order to further enhance monetary policy and promote market-based interest rates. It serves as a monthly benchmark interest rate to banks in China when they are serving their best (trustworthy and loyal) customers. There are two types of LPR: the one-year and the five-year LPR. The one-year LPR affects short-term loans like private and business loans. Whereas the five-year LPR is often used for mortgages.

In response to injecting fresh momentum into the economy, China’s central bank, the People’s Bank of China, slashed its administrative interest rates in the hopes of increasing money and consumer demand. According to The Times of India, they announced that they’re going to slash their one year loan prime rate from 3.1% to 3.0%. Furthermore, they’re planning to decrease their five year loan prime rate by 10 basis points to 3.5%. It is a known macroeconomic government action that when the central bank cuts administrative interest rates, it’s their way of conducting an expansionary monetary policy. As a result of an expansionary monetary policy, people would tend to borrow more, encouraging consumers in households and businesses to spend and invest more. By increasing consumer spending, China hopes that its aggregate demand will increase and stimulate economic growth to help it get out of the current recession.

With these newly slashed interest rates, these are the lowest loan prime rates that have ever been seen in history. However they did say that “the rate cuts will reduce interest payments on existing loans. It will also reduce the price of new loans.” In addition to these LPR cuts, Zichun Huang, a classic economist, claims that there will be more rate cuts in the near future and this won’t be the last time we’re going to see them. He suggests a dynamic and evolving financial environment and these rate cuts are going to offer both a relief to existing borrowers and creating a more attractive borrowing environment for new loans. We have still yet to see how China's economy will progress and how it responds long-term to it's monetary policy.

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