China’s Banks Supplied Some New Home Remedies

China’s Banks Supplied Some New Home Remedies
Daniel Johnston

9 months ago2 mins

What’s going on here?

Chinese banks issued some much-needed tonics on Thursday to stimulate China’s limp economy.

What does this mean?

China’s usual moneymaker is looking listless right now, with unenthusiastic global demand leaving its mammoth export industry unsatisfied, unfulfilled, and maybe a little dejected. And because the country’s population is saving instead of shopping, China needs a little help getting back to its usual spritely, frisky self. Enter, banks: following the government’s call to action, the country’s six biggest state-run banks cut deposit rates on Thursday for the second time in under a year. That should shrink banks’ costs, so they can eventually lend to businesses and regular folks for less and encourage spending. And because lower rates will curb the interest that cash makes in savings accounts, there’s even more reason to take money to the shops. Essentially, just call rate cuts the aphrodisiac of consumer spending.

China exports

Why should I care?

Zooming in: Let’s get spicy.

Voyeuristic economists and investors have been eagerly watching the whole debacle, waiting for the right move to spice up the economy. But it’ll take more than rate cuts: China’s population isn’t confident about money, with disposable income growing frustratingly slowly. That’s not helped by the lethargic real estate market. The “wealth effect” suggests folks feel richer when the value of big assets – like homes, Chinese households’ biggest source of wealth – rises, even if their incomes stay the same. But with a tired outlook for the housing market, the sector needs some more stimulation before it can start performing.

China rate cuts
Chinese bank deposit rate cuts | Source: Bloomberg

The bigger picture: America rules – for now.

Over the years, China’s often been forecast to imminently overtake the US as the world’s biggest economy. But combine China’s recent troubles and dipping productivity with the US’s development-hindering sanctions, and the fight for the crown’s been a longer slog than it might’ve been. In fact, some economists reckon it’ll be 2030-something before China takes over – if it ever does.

Forecasts of China overtaking the US
Source: The Economist
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