China’s Central Bank maintains lending rate amid slump in real estate

China's central bank chose to keep a key lending rate unchanged on Monday, opting not to loosen credit despite ongoing economic challenges in the manufacturing and real estate sectors. The rate for 1-year medium-term lending facility loans was held at 2.5%, aligning with expectations. Instead of cutting interest rates, Beijing is channeling spending toward high-priority areas like high-tech industries.

China economic slowdown

The government reported that factory output fell by 5.6% in May compared to the previous year, a slowdown from April’s 6.7%. Analysts attributed some of the decline to an increased number of workdays this year. In the real estate sector, property investments dropped 10% year-on-year, and home sales plummeted 30.5%, indicating that recent measures to revive the market have yet to take effect. Home prices in major cities like Beijing and Shanghai fell by 3.2%.

The downturn in the property market followed a crackdown on excessive borrowing by developers, leading to defaults and difficulties in delivering pre-sold apartments. This has adversely impacted contractors and suppliers.

“This data was certainly on the disappointing side and may ring some alarm bells,” commented Lynn Song, chief economist for Greater China at ING Economics.

Disruptions and job losses during the COVID-19 pandemic, along with falling home prices, have left many Chinese consumers hesitant to spend, weakening another key driver of the economy.

However, Liu Aihua, spokesperson for the National Bureau of Statistics, highlighted positive trends, such as rising retail sales and investments in high-tech industries. A recycling program for old appliances and incentives for electric vehicle purchases are also boosting consumer spending. Online sales rose 11.5% in May, while household appliance sales increased nearly 13%. Vehicle sales grew 8.3% year-on-year, reaching nearly 11.5 million units from January to May.

“Buying capacity and consumer confidence need further improvement, but there are many favorable factors supporting continued growth of the consumer market,” Liu said.

She added that additional policies would be introduced to support the struggling real estate market, following recent reductions in mortgage rates and down-payment requirements. "We must also see that the implementation time of some policies is still relatively short," Liu noted.