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
China stops releasing youth unemployment data after it hit consecutive record highs
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.”
Human Resources Officers must be very busy these days what with the general turnover of employees in our retail and business sectors. It is hard enough to find skilled people let alone potential employees willing to be trained. Then after the training, a few weeks go by then they come to you and ask for a raise. You refuse as there simply is no excess money in the budget and away they fly to wherever they come from, trained but not willing to put in the time to achieve that wanted raise.
I have had potentials come in and we give them a test to see if they do indeed know how to weld, polish or work with wood. 2-10 we hire, and one of those is gone in a week or two. Ask that they want overtime, and their laughter leaving the building is loud and unsettling. Housing starts are doing well but way behind because those trades needed to finish a project simply don’t come to the site, with delay after delay. Some people’s attitudes are just too funny. A recent graduate from a Ivy League university came in for an interview. The position was mid-management potential, but when we told them a three month period was needed and then they would make the big bucks they disappeared as fast as they arrived.
Government agencies are really no help, sending us people unsuited or unwilling to carry out the jobs we offer. Handing money over to staffing firms whose referrals are weak and ineffectual. Perhaps with the Fall and Winter upon us, these folks will have to find work and stop playing on the golf course or cottaging away. Tried to hire new arrivals in Canada but it is truly difficult to find someone who has a real identity card and is approved to live and work here. Who do we hire? Several years ago my father’s firm was rocking and rolling with all sorts of work. It was a summer day when the immigration officers arrived and 30+ employees hit the bricks almost immediately. The investigation that followed had threats of fines thrown at us by the officials. Good thing we kept excellent records, photos and digital copies. We had to prove the illegal documents given to us were as good as the real McCoy.
Restauranteurs, builders, manufacturers, finishers, trades-based firms, and warehousing are all suspect in hiring illegals, yet that becomes secondary as Toronto increases its minimum wage again bringing our payroll up another $120,000. Survival in Canada’s financial and business sectors is questionable for many. Good luck Chuck!. at least your carbon tax refund check should be arriving soon.
NORMAN WELLS, N.W.T. – Imperial Oil says it will temporarily reduce its fuel prices in a Northwest Territories community that has seen costs skyrocket due to low water on the Mackenzie River forcing the cancellation of the summer barge resupply season.
Imperial says in a Facebook post it will cut the air transportation portion that’s included in its wholesale price in Norman Wells for diesel fuel, or heating oil, from $3.38 per litre to $1.69 per litre, starting Tuesday.
The air transportation increase, it further states, will be implemented over a longer period.
It says Imperial is closely monitoring how much fuel needs to be airlifted to the Norman Wells area to prevent runouts until the winter road season begins and supplies can be replenished.
Gasoline and heating fuel prices approached $5 a litre at the start of this month.
Norman Wells’ town council declared a local emergency on humanitarian grounds last week as some of its 700 residents said they were facing monthly fuel bills coming to more than $5,000.
“The wholesale price increase that Imperial has applied is strictly to cover the air transportation costs. There is no Imperial profit margin included on the wholesale price. Imperial does not set prices at the retail level,” Imperial’s statement on Monday said.
The statement further said Imperial is working closely with the Northwest Territories government on ways to help residents in the near term.
“Imperial Oil’s decision to lower the price of home heating fuel offers immediate relief to residents facing financial pressures. This step reflects a swift response by Imperial Oil to discussions with the GNWT and will help ease short-term financial burdens on residents,” Caroline Wawzonek, Deputy Premier and Minister of Finance and Infrastructure, said in a news release Monday.
Wawzonek also noted the Territories government has supported the community with implementation of a fund supporting businesses and communities impacted by barge cancellations. She said there have also been increases to the Senior Home Heating Subsidy in Norman Wells, and continued support for heating costs for eligible Income Assistance recipients.
Additionally, she said the government has donated $150,000 to the Norman Wells food bank.
In its declaration of a state of emergency, the town said the mayor and council recognized the recent hike in fuel prices has strained household budgets, raised transportation costs, and affected local businesses.
It added that for the next three months, water and sewer service fees will be waived for all residents and businesses.
This report by The Canadian Press was first published Oct. 21, 2024.
TORONTO – A new report says many Canadian business leaders are worried about economic uncertainties related to the looming U.S. election.
The survey by KPMG in Canada of 735 small- and medium-sized businesses says 87 per cent fear the Canadian economy could become “collateral damage” from American protectionist policies that lead to less favourable trade deals and increased tariffs
It says that due to those concerns, 85 per cent of business leaders in Canada polled are reviewing their business strategies to prepare for a change in leadership.
The concerns are primarily being felt by larger Canadian companies and sectors that are highly integrated with the U.S. economy, such as manufacturing, automotive, transportation and warehousing, energy and natural resources, as well as technology, media and telecommunications.
Shaira Nanji, a KPMG Law partner in its tax practice, says the prospect of further changes to economic and trade policies in the U.S. means some Canadian firms will need to look for ways to mitigate added costs and take advantage of potential trade relief provisions to remain competitive.
Both presidential candidates have campaigned on protectionist policies that could cause uncertainty for Canadian trade, and whoever takes the White House will be in charge during the review of the United States-Mexico-Canada Agreement in 2026.
This report by The Canadian Press was first published Oct. 22, 2024.
