However, economists warned that recent efforts to stimulate the economy were not enough to avert a housing crisis. The drop in confidence in China’s debt-laden property developers coincides with a drop in consumer confidence due to pandemic restrictions and power shortages after record summer temperatures.
No large-scale stimulus
“The much larger cut to the five-year rate suggests that the PBoC is particularly concerned about problems in the housing market,” Sheana Yue, chief China economist at Capital Economics, said on Monday.
“Although more easing is anticipated, credit growth is proving less sensitive to policy easing than in the past. In addition, the PBOC still seems reluctant to adopt large-scale stimulus despite slowing credit growth.
The latest rate cuts have pushed the yuan to a two-year low against the US dollar and fueled investor fears that China may not be able to avoid a recession if it cannot stabilize its faltering economy.
The world’s second-largest economy has been hit by COVID-19 lockdowns, cash crunches from its indebted property developers and a heat wave and drought that have forced factories to close due to power outages.
The latest cuts won’t bring immediate relief to many homeowners, as existing mortgages won’t be affected until early next year.
Wang Qing, chief macro analyst at Orient Gold, said caixin the latest rate cuts indicated specific support for the real estate market and the interest rate on bank deposits could be reduced by between 5 and 10 basis points later this year.
However, other economists warned that monetary stimulus alone would not solve the structural problems in China’s property market, as China’s zero-COVID strategy had sapped investor confidence and property demand. House prices are plummeting in many cities and Chinese investors, who once clamored to buy investment properties, are no longer interested.
China property sales in July plunged 29% compared to an 18% drop in June, construction starts fell 45%, and this weighed on private sector credit growth, which slowed to 8.6 %.
A spike in COVID-19 cases has also raised fears of more citywide lockdowns similar to the one experienced in Shanghai for two months earlier this year.
The Chinese government is not expected to achieve its previous 2022 GDP growth forecast of “around 5.5 percent.” Last week, Nomura cut its 2022 forecast to 2.8 percent from 3.3 percent, while Goldman Sachs lowered its forecast to 3 percent.
Capital Economics says “official growth” is likely to be around 3 percent, but it will actually be zero. Economists say property owners across the country are refusing to pay loans on unfinished properties to cash-strapped developers.
Any recession in China worries investors in Australia, which relies heavily on demand for iron ore and other raw materials from Chinese mills.
However, Beijing is not expected to go ahead with huge stimulus packages as it has in the past. Instead, politicians seek to stabilize the real estate sector with modest rate cuts without causing inflation to rise.