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China’s real estate stimulus faces consumer confidence test

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China recently announced lowering interest rates on current mortgages and relaxing regulations for first-time homebuyers in major cities

Following China’s most recent initiatives to bolster the struggling real estate market, Simon Yu’s monthly mortgage payments for his Shanghai apartment will decrease, but so will the interest he receives in his bank accounts.

Yu’s predicament demonstrates the challenge Beijing confronts in reviving sluggish consumer spending. While reducing interest rates lessens household financial pressures, researchers claim that consumers are unable to loosen their purse strings due to the bleak economic outlook and the absence of longer-term changes in sectors like pensions and healthcare.

About one of the government’s stated goals for those measures, Yu, an asset management firm, told Reuters, “The rate cuts have little impact on my spending power.”

China recently announced lowering interest rates on current mortgages and relaxing regulations for first-time homebuyers in major cities, actions that the central bank and financial regulators described as “conducive to expanding consumption.”

The country’s property market has been rocked by faltering consumers as property giants Evergrande and Country Garden face debt woes. Country Garden just narrowly avoided default while Evergrande has filed for bankruptcy protection.

China’s house prices slipped in July 2023, falling 0.1% year-on-year after a brief recovery in May and remaining flat in June.

However, in a coordinated action, state-owned banks also reduced deposit rates by 10 to 25 basis points to stop profit margins from further contracting. According to Nomura analysts, borrowers might save 200–300 billion yuan (USD 27–41 billion) annually as a result of the mortgage rate reductions.

However, they also note that a 15 basis point reduction in interest rates on the 131.4 trillion yuan in deposits held by Chinese families will result in a 197 billion per year reduction in interest income.

First-time homebuyer mortgage rates hover around 4%, while rates on one-year fixed deposits are approximately 1.5%. Ting Lu, chief China economist at Nomura, described it as “more of a redistribution of income” and claimed it had “limited” effects on spending.

In an economy where real estate accounts for 70% of household wealth, researchers think there is some justification for trying to stabilize the housing market. However, eventually, rather than using household savings, transferring resources from other parts of the economy to consumers would be the most effective approach to encourage Chinese people to spend.

Zhaopeng Xing, senior China analyst at ANZ, stated that “the main constraint is people’s income,” adding that the recent measures’ “mild” boost to consumer confidence will only be temporary. Yu projects a 1,000 yuan reduction in his monthly mortgage payments, which would be somewhat offset by a decrease in interest income from his accounts. He might invest a portion of his funds in stocks and bonds in the hopes of safeguarding his future gains. However, some people are risk-averse, particularly in light of the rising employment insecurity.

Despite being dissatisfied with the decreased rates, Li Xiao, a data analyst in Shanghai, said that he would retain the money in the bank. The depositors eventually suffer the costs, Li claimed, despite the government’s desire to increase consumption. Because people don’t spend because they have no money, decreasing deposit rates won’t be very effective.

Under the condition of some anonymity, Guo, a state-employed employee in the southern province of Guangdong, said he would continue to save “even if deposit rates drop to zero.”

“The economy is bad, and people don’t have enough confidence,” he declared.

“Keeping the principal with you is already a win,” Nancy Yang, who works for an auto parts supplier in Wuhan, in central China, claims that the lack of end-of-year incentives from her workplace for 2022 is the main reason she isn’t spending her money.

“I’m not saving because of the meagre interest rate, Yang remarked, but rather because there are too many unknowns, including unreliable enterprises, stagnant income, house payments, and raising children,” she added further.

Experts Not Impressed

China’s real estate sector is going in “two directions,” and even though further stimulus was expected, a recovery won’t happen anytime soon, according to a former advisor to the People’s Bank of China.

“The property market right now in China is actually two-fold. It’s actually going in two directions,” Li Daokui, now a professor of economics at Tsinghua University, told CNBC.

Asked if Beijing’s policy response should be “bolder,” Li said there are “many meetings, discussions, deliberations which are [unseen] below the water.”

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