China has surprised investors by deciding not to cut an important interest rate that influences mortgages, in a move that economists say will make it tough to revive confidence in the country’s troubled real estate sector which has dragged down prospects for the world’s second largest economy.
The People’s Bank of China (PBOC) kept its five-year loan prime rate (LPR), which stands at 4.2%, on hold on Monday, while trimming its one-year loan prime rate by 10 basis points from 3.55% to 3.45%.
The cut to the one-year rate was widely expected, but the lack of action on the five-year rate was not. Nearly all of the analysts polled by Reuters had predicted that the five-year rate, which serves as the mortgage reference rate, would be reduced by at least 15 basis points.
The outcome was “underwhelming,” Julian Evans-Pritchard and Zichun Huang of Capital Economics wrote in a Monday research note.
“On its own, the latest round of cuts is too small to have a big impact,” the China economists wrote. “[This] strengthens our view that the PBOC is unlikely to embrace the much larger rates cuts that would be required to revive credit demand.”
The LPR sets the interest that commercial banks charge their best clients and serves as the benchmark for household and corporate lending. The one-year rate affects most new and outstanding loans, while the five-year rate influences the pricing of longer term loans, such as mortgages.
People select shoes in a shopping mall in Beijing on June 15, 2023. (Photo by WANG Zhao / AFP) (Photo by WANG ZHAO/AFP via Getty Images)
Wang Zhao/AFP/Getty Images
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A reduction in the rate would lower the cost of borrowing for those taking out loans or paying down interest.
Stocks in Hong Kong and mainland China, as well as the Chinese currency, weakened on the news. Hong Kong’s Hang Seng
(HSI) traded 1.5% lower, falling deeper into a bear market, while the Shanghai Composite
(SHCOMP) was down 0.5%.
The Chinese yuan has lost nearly 6% against the dollar so far this year, as concerns swirl about the future of the Chinese economy, which reported another month of lackluster economic data last week.
Economists had expected cuts to the loan prime rate after China made a surprise slash to another rate, its medium term lending facility (MLF), last week. It lowered that by 15 basis points, to 2.5% on Tuesday.
The loan prime rate is linked to the MLF, so new reductions Monday were “pretty much a given,” according to Capital Economics.
Even if the PBOC had met expectations by slashing rates as much as expected, it would have been “far from being enough to boost growth,” Goldman Sachs analysts said in a research note.
The People’s Bank of China (PBOC) building seen in May in Beijing.
Jiang Qiming/China News Service/VCG/Getty Images
The central bank said Sunday that it held a meeting late last week with state-owned commercial banks, government agencies and other institutions to discuss the policy support needed.
During the meeting, China’s economic recovery was described as coming in waves and part of a “zigzag” process, it said in a joint statement with the financial and securities regulators.
“Major financial institutions should take the initiative to act and increase loans, and large state-owned banks should continue to play a supporting role,” they said.
“We must pay attention to maintaining the pace of stable loan growth, properly guide credit fluctuations, and enhance the stability of financial support for the real economy.”
Growing headaches
Monday’s announcement adds to concerns over the state of China’s economy.
On Monday, UBS downgraded its economic forecast for the country, saying it now expects growth of 4.8% for 2023 and 4.2% for 2024. That compares with previous projections of 5.2% and 5%, respectively.
The downgrade was made “in light of a deeper and longer property downturn and weakening global demand,” China economist Tao Wang said in a research report.
“China’s economic growth has decelerated since April as the property downturn deepened. The government’s policy support has arguably been less than was indicated earlier in the year, and less than we expected.”
TOPSHOT – The Evergrande logo is seen on residential buildings in Nanjing, in China’s eastern Jiangsu province on August 18, 2023. Embattled Chinese property giant Evergrande Group filed for bankruptcy protection in the United States on August 17, 2023, court documents showed, a measure that protects its US assets while it efforts a restructuring deal. (Photo by STRINGER / AFP) / China OUT (Photo by STRINGER/AFP via Getty Images)
AFP/Getty Images
Evergrande’s bankruptcy may be just the beginning of China’s real estate crisis
China has tried to shore up support, with the PBOC cutting both LPR rates in June for the first time since August 2022. That was when the economy was being hit by renewed Covid lockdowns and a deepening property downturn.
But after achieving a solid start at the beginning of the year, the economic picture has darkened. A slowdown was recorded across various parts of the economy in July and pressure has worsened in the vast real estate market.
Last week, official data showed consumer spending, factory production and investment in fixed assets had all slowed further in July from a year ago. Meanwhile, Chinese exports that month suffered their biggest drop in more than three years.
The company logo of Chinese developer Country Garden is pictured at the Shanghai Country Garden Center in Shanghai, China on August 9, 2023.
Aly Song/Reuters
China’s Country Garden suspends trading of onshore bonds amid talk of debt restructuring
Chinese markets were also weighed down last week by “rising concerns related to the housing market and its contagion to the financial economy,” Goldman Sachs analysts noted in a Saturday research report.
Investors have been worried about the multibillion-dollar debt load of one of China’s top property developers, Country Garden. Lately, the company has missed some payments and suspended trading of onshore bonds, contributing to fears of a default.
Last week, Evergrande, another troubled Chinese developer, filed for bankruptcy in the United States, adding to jitters about a broader crisis. This means it will be even harder for policymakers to forge a turnaround.
“Reviving demand would take much larger rate cuts, or regulatory measures to effectively restore confidence in the housing market,” Capital Economics said Monday.
“The big picture is that the PBOC’s approach to monetary policy is of limited use in the current environment and won’t be enough, on its own at least, to put a floor beneath growth.”
VANCOUVER – Mediated talks between the union representing HandyDART workers in Metro Vancouver and its employer, Transdev, are set to resume today as a strike that has stopped most services drags into a second week.
No timeline has been set for the length of the negotiations, but Joe McCann, president of the Amalgamated Transit Union Local 1724, says they are willing to stay there as long as it takes, even if talks drag on all night.
About 600 employees of the door-to-door transit service for people unable to navigate the conventional transit system have been on strike since last Tuesday, pausing service for all but essential medical trips.
Hundreds of drivers rallied outside TransLink’s head office earlier this week, calling for the transportation provider to intervene in the dispute with Transdev, which was contracted to oversee HandyDART service.
Transdev said earlier this week that it will provide a reply to the union’s latest proposal on Thursday.
A statement from the company said it “strongly believes” that their employees deserve fair wages, and that a fair contract “must balance the needs of their employees, clients and taxpayers.”
This report by The Canadian Press was first published Sept. 12, 2024.
MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
Dollarama Inc.’s food aisles may have expanded far beyond sweet treats or piles of gum by the checkout counter in recent years, but its chief executive maintains his company is “not in the grocery business,” even if it’s keeping an eye on the sector.
“It’s just one small part of our store,” Neil Rossy told analysts on a Wednesday call, where he was questioned about the company’s food merchandise and rivals playing in the same space.
“We will keep an eye on all retailers — like all retailers keep an eye on us — to make sure that we’re competitive and we understand what’s out there.”
Over the last decade and as consumers have more recently sought deals, Dollarama’s food merchandise has expanded to include bread and pantry staples like cereal, rice and pasta sold at prices on par or below supermarkets.
However, the competition in the discount segment of the market Dollarama operates in intensified recently when the country’s biggest grocery chain began piloting a new ultra-discount store.
The No Name stores being tested by Loblaw Cos. Ltd. in Windsor, St. Catharines and Brockville, Ont., are billed as 20 per cent cheaper than discount retail competitors including No Frills. The grocery giant is able to offer such cost savings by relying on a smaller store footprint, fewer chilled products and a hearty range of No Name merchandise.
Though Rossy brushed off notions that his company is a supermarket challenger, grocers aren’t off his radar.
“All retailers in Canada are realistic about the fact that everyone is everyone’s competition on any given item or category,” he said.
Rossy declined to reveal how much of the chain’s sales would overlap with Loblaw or the food category, arguing the vast variety of items Dollarama sells is its strength rather than its grocery products alone.
“What makes Dollarama Dollarama is a very wide assortment of different departments that somewhat represent the old five-and-dime local convenience store,” he said.
The breadth of Dollarama’s offerings helped carry the company to a second-quarter profit of $285.9 million, up from $245.8 million in the same quarter last year as its sales rose 7.4 per cent.
The retailer said Wednesday the profit amounted to $1.02 per diluted share for the 13-week period ended July 28, up from 86 cents per diluted share a year earlier.
The period the quarter covers includes the start of summer, when Rossy said the weather was “terrible.”
“The weather got slightly better towards the end of the summer and our sales certainly increased, but not enough to make up for the season’s horrible start,” he said.
Sales totalled $1.56 billion for the quarter, up from $1.46 billion in the same quarter last year.
Comparable store sales, a key metric for retailers, increased 4.7 per cent, while the average transaction was down2.2 per cent and traffic was up seven per cent, RBC analyst Irene Nattel pointed out.
She told investors in a note that the numbers reflect “solid demand as cautious consumers focus on core consumables and everyday essentials.”
Analysts have attributed such behaviour to interest rates that have been slow to drop and high prices of key consumer goods, which are weighing on household budgets.
To cope, many Canadians have spent more time seeking deals, trading down to more affordable brands and forgoing small luxuries they would treat themselves to in better economic times.
“When people feel squeezed, they tend to shy away from discretionary, focus on the basics,” Rossy said. “When people are feeling good about their wallet, they tend to be more lax about the basics and more willing to spend on discretionary.”
The current economic situation has drawn in not just the average Canadian looking to save a buck or two, but also wealthier consumers.
“When the entire economy is feeling slightly squeezed, we get more consumers who might not have to or want to shop at a Dollarama generally or who enjoy shopping at a Dollarama but have the luxury of not having to worry about the price in some other store that they happen to be standing in that has those goods,” Rossy said.
“Well, when times are tougher, they’ll consider the extra five minutes to go to the store next door.”
This report by The Canadian Press was first published Sept. 11, 2024.
