China’s central bank (PBOC) unexpectedly lowered the key policy interest rate on August 15 in an effort to revive the economy, which is facing fresh risks from a troubled real estate market and consumer spending.
According to Bloomberg, the PBOC has reduced the 1-year medium-term lending mechanism (MLF) interest rate applicable to certain financial institutions from 2.65% to 2.5%. This is the second time since June that the PBOC has reduced this operating rate.
Moreover, the decline of 0.15 percentage points is also the biggest since 2020. According to a Reuters poll this week, experts polled as of 20/26 said the PBOC kept the MLF rate unchanged.
The move comes just before China’s National Bureau of Statistics (NBS) released less positive economic activity data for July. Specifically, retail sales, industrial production and real estate investment. The growth rate was not as per the expectation of the analysts.
A new NBS report says domestic demand is still “inadequate” and “the foundations of economic recovery still need to be strengthened”. According to the agency’s statement, China needs to “promote macroeconomic policy adjustments and focus on boosting domestic demand, improving confidence and averting risks”.

An apartment building project of the Country Garden Company in Beijing – China on August 11. Photo: Reuters
Some experts believe industrial production could be affected due to heavy rains and severe flooding in some areas last month. Meanwhile, private fixed investment declined 0.5% year-on-year in the first 7 months of this year, indicating weakening confidence.
The urban unemployment rate rose to 5.3%, up from 5.2% in June, according to the NBS. Significantly, this report does not have data on unemployment rate by age. In June, the unemployment rate for 16-24 year olds was 21.3%, a record high.
A spokeswoman for the NBS said the agency had stopped providing the data due to social and economic changes and was re-evaluating its statistical methodology.
Page Bloomberg The move to lower interest rates shows that Chinese policy makers are concerned about the rapidly deteriorating outlook for the economy, especially the real estate sector.
At the same time, the problems of the Chinese economy are also causing concern in the world. US Treasury Secretary Janet Yellen said China’s slowdown was a “risk factor” for the US economy, although Beijing’s neighboring economies would be more affected.
China is currently facing many calls for more monetary and fiscal stimulus to support the economy.
Carlos Casanova, an expert at Union Bancare Privée Bank (Switzerland), predicts that the next step of the PBOC is to reduce the reserve requirement ratio (RRR) for commercial banks. Apart from this, some experts also talk about the possibility that PBOC will cut its lending prime rate (LPR) next week.
However, Mr. Larry Hu, an expert at Macquarie Financial Services Company, said that lowering interest rates is not enough. According to him, the biggest problem at the moment in the world’s second largest economy is the real estate sector, whose main concern is falling sales and confidence.
Meanwhile, Mr. Ting Lu, an expert at Nomura Company (Japan), believes that Beijing will be forced to take more measures to reduce tensions in the region.
Is Evergrande a country garden?
Country Gardens, China’s biggest private real estate developer, defaulted on two lots of bonds on August 14 and warned of billions of dollars in losses, raising concerns about the growing sector.
Country Garden, once considered a financially sound company, was at risk of default if it continued to default on its bond payments. Country Gardens may have to pay up to $1.25 billion in domestic bonds in September alone, according to Reuters calculations.
Country Garden’s stock fell on August 14 following the above developments. Earlier, the chairman of the country garden, Ms. Yang Huiyan, admitted that they are facing the biggest difficulties since its establishment. The company is estimated to have $159 billion in debt by the end of 2022. This month, Country Garden projected a net loss of $6.2-7.6 billion in the first half of 2023.
The sector has faced dwindling sales, tight liquidity and a series of developer defaults since late 2021. At the center of this debt crisis is the Evergrande group. Now, if Country Garden collapses, China’s financial system and economy are at risk of dire consequences.
According to Bloomberg Intelligence expert Christy Hung, Country Garden has four times more real estate projects than Evergrande, so any credit crunch in Country Garden would have a greater impact on the housing market, and also, any credit crunch in Country Garden will be. The housing market will have a more profound impact. The confidence of home buyers will be low.
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