China’s greater than expected cut to its mortgage rate has served to highlight the authorities’ concerns about the country’s economic fragility, says Susannah Streeter, head of money and markets, Hargreaves Lansdown.
The fragility of China’s economy is weighing on minds as the country remains mired in a real estate slump with the latest attempt to stimulate demand highlighting the depths of the problems. The People’s Bank of China cut a key lending rate, the 5-year loan prime rate by 25 basis points, to 3.95%, more than the 15 basis points expected, and the first reduction since last summer.
The sharper than expected cut hasn’t done the trick of shoring up confidence yet. It’s concentrated minds on the collision of concerns about the economy, from real estate debts to deflation to falling foreign investment.
China’s property woes extend deep into the economy. Construction fired up growth in China over the last few decades as urbanisation accelerated, fuelled by debt, and efforts to rein that in and tighten regulation have caused a big wobble. This matters because the property sector accounts for some 30% of GDP. Already chunks of the property house of cards have begun to collapse, such as the giant Evergrande, now in liquidation in Hong Kong. Although given the high savings rates in China, mortgage defaults are less of a concern, falling prices affect household wealth perceptions and consumption across the economy. Although overall spending during the longer Lunar New Year holidays beat 2019 levels, the amount spent per trip was down around 9%, a symptom of the consumer cautiousness hitting the huge country.
