Chinese consumption drives over 60% of GDP growth
Mortgage rates drop to record lows. Billions from treasury issues to be used to boost consumption.
Our briefing on critical economic and financial developments in China as of Tuesday, 30 July, 2024:
The head of the China Securities Regulatory Commission (CSRC) convened a meeting with executives from foreign-invested financial institutions, in a bid to reassure them of future policy settings.
Mortgage rates have fallen to record lows of less than 3%, with state-owned media anticipating declines in business and consumer loan rates to boost aggregate demand.
The central bank is expected to cut the reserve ratio in the second half, in order to expand liquidity as Chinese long-term treasury issues increase.
Beijing will use billions raised from ultra-long treasury issuance to spur the replacement consumption of durable goods.
The central bank makes a surprise cut to the medium-term lending facility (MLF) rate after reducing the 7-day reverse repo rate, for adjustments to both of China’s key policy rates.
The flagship newspaper of the Communist Party has hailed the rise of domestic consumption to account for over 60% of new GDP growth.
The Chinese yuan’s share of global payments has doubled compared to the end of 2022, as Beijing becomes jittery over the ability of Washington to freeze its overseas accounts.
China's top securities regulator meets with foreign financial execs
Wu Qing (吴清), the chair and party secretary of the China Securities Regulatory Commission (CSRC), recently met with executives from 10 foreign invested financial institutions at a meeting in Beijing, including securities companies, fund managers, futures institutions and qualified foreign institutional investors (QFII).
At the meeting, Wu committed to "firmly and unwaveringly deepening reform and expanding opening," as well as "strengthening regulation and vigorous protection of the lawful rights and interests of investors...and continuing to strengthen policy continuity and predictability.”
"[I] hope that foreign invested institutions employ their advantages as international investment banks and international investors, employ their role as a bridge to the global economy, and do a good job of telling China's story," Wu said.
Mortgage rates fall to record lows of less than 3%, state-owned media anticipates boost to consumer lending
China's state-owned media hopes that declining interest rates can help boost private business investment and household consumption.
According to a report from the Xinhua News Agency, first home-loan rates have already fallen to record lows of less than 3% in Jiangsu province capital of Nanjing, with banks in the first-tier mega-cities of Beijing, Shanghai and Guangzhou expected to soon follow suit.
The declines arrive just after the Chinese central bank announced falls in the benchmark loan prime rates (LPR) on 22 July - the second round of reductions since the start of 2024.
The LPRs for July came in at 3.35% for the 1-year LPR and 3.85% for the 5-five year LPR, for declines of 10 basis points compared to the previous month.
New commercial home loans are generally pegged to the 5-year LPR. The reduction prompted banks in Shanghai and Beijing to reduce first home loan rates to 3.4%, and second home loan rates to 3.6 - 3.8%.
Xinhua expects ongoing declines in Chinese interest rates to soon spread to loans to private businesses.
"Following China's lending rates falling to new record lows, enterprise loan rates will also enter the 3% era, and many micro-and-small enterprises and individual industrial and commercial proprietors will enjoy the benefits of falling rates,” the report said.
Consumer lending is also expected to benefit.
"Reductions in the interest burden for consumers will help spur consumption, especially for large-scale goods such as vehicles and home improvements," said one member of the finance sector in the Sichuan province capital of Chengdu.
"This will bring banks opportunities to expand their lending operations."
Chinese central bank expected to cut reserve ratio in second half
Zhong Zhengsheng (钟正生), chief economist with Ping’an Securities, said to Securities Daily that the People's Bank of China (PBOC) is set to cut the reserve ratio requirement for Chinese banks in the second half of 2024, to provide liquidity to support economic growth.
"The central bank must reduce the reserve ratio requirement by 25 to 50 basis points across the board to unleash 500 billion to 1 trillion yuan in funds, given the need to supplement shortcomings in base money, stabilise the size of the money supply, and improve liquidity indices for commercial banks," Zhong said.
According to Zhong, these needs are driven by a gradual increase in the volume of maturing medium-term lending facilities (MLF) provided by the central bank, as well as an increase in the volume of government bond financing.
Beijing to use billions in ultra-long treasury issues to boost Chinese consumption
On 25 July, Beijing issued the "Several Measures on Expanding the Intensity of Support for Large-Scale Capital Upgrades and Consumption Goods Replacement" (关于加力支持大规模设备更新和消费品以旧换新的若干措施).
The Measures outline the use of 300 billion yuan in funds raised via ultra-long treasury issues to expand support measures for both large-scale capital upgrades and "old-for-new" consumer purchases.
They raise the size of subsidies for Chinese consumers who trade in their old cars to purchase new ones, from 10,000 yuan to 20,000 yuan for the purchase of clean energy vehicles, and 7000 yuan to 15,000 yuan for the purchase of standard ICE models.
Chinese central bank cuts key policy rate 20 basis points to spur enterprise and household demand
The People's Bank of China (PBOC) has reduced the rate for its medium-term lending facility (MLF) - long considered to be its key policy rate.
On 25 July, PBOC engaged in 235.1 billion yuan in 7-day reverse repo operation and 200 billion yuan in MLF operations, in a move which caught the market by surprise.
In recent years, PBOC has customarily engaged in a single MLF operation per month on the 15th.
The MLF operation on 25 July marked the second for this month. The rate for the surprise MLF operation was 2.3%, for a 20 basis point decline compared to the previous round of MLF operations earlier in the month.
The reduction arrived just days after PBOC announced reductions to a slew of key interest rates on 22 July, with the 1-year loan prime rate (LPR), the 5-year LPR, the 7-day reverse repo rate and the standing lending facility rate (SLR) all falling 10 basis points.
Domestic analysts point out the sizeable cut in the MLF signals the Chinese central bank's determination to reduce rates on loans to businesses and households, to help spur aggregate demand in the economy.
"The decline for this MLF is quite large, and is perhaps related to the sizeable decline in yields on interbank certificates of deposit, making them markedly lower than MLF rates," said Wang Qing, chief macro-analyst at Golden Credit Rating.
China's Communist Party hails rise of consumption to drive over 60% of GDP growth
The People's Daily - the flagship newspaper of China's Communist Party, has published a headline editorial piece hailing the growth of consumption and its contribution to GDP.
The editorial piece entitled "The Potential of Internal Demand Continually Unleashed" (内需潜力不断释放) states that the contribution rate of end consumption to economic growth in China currently stands at 60.5%, driving a GDP increase of 3.0 percentage points in the first half.
By contrast, the rate for capital formation is 25.6%, driving GDP growth of 1.3 percentage points.
"In the first half, domestic demand continued to recover, providing a strong support for the stabilisation and improvement of the economy."
A senior official from the "Consumption Spurring Office" of China's Ministry of Commerce said that since the start of the year, the ministry has undertaken a series of official activities as part China's official "Year of Spurring Consumption" (消费促进年”).
Chief amongst these have been policies to subsidise old-for-new purchases, with the goal of spurring stable growth in consumption.
Chinese yuan's share of global payments doubles since end of 2022
The renminbi's share of global payments stood at 4.61% in June of this year, for a 0.14 percentage point increase compared to May, according to the latest monthly data from the Society for Worldwide Interbank Financial Telecommunication (SWIFT).
June marks the eight consecutive month that China's official currency has taken fourth place in terms of global payments, as well as a near doubling of its share in November 2022, when the print stood at just 2.37%.