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China: Central Bank benchmark rates and real estate sector crisis potential

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The People’s Bank of China did not change the benchmark loan interest rate (LPR). In line with market expectations, the People’s Bank of China kept the 1-year LPR interest rate at 3.70% and the 5-year LPR interest rate at 4.60%. Record credit expansion in January may have lessened the urgency of the PBOC to push lending rates further down in the very short term.

 

On the other hand, a crisis phenomenon emanating from the real estate sector, which may cause a general economic slowdown, continues to be triggered. After Evergrande and several other companies, Zhenro Properties officially announced that it was in financial difficulties. Due to unfavorable market conditions, the internal resources available to the company for debt payments have become increasingly limited. Therefore, the company expects that its current internal resources may be insufficient to meet debt maturities approaching March 2022, including the full redemption of securities on March 5, 2022.

 

Housing sales are still declining. Now that the real estate sector is also largely related to the financial system, the real estate crisis plus the banking crisis is a factor that increases the risk of a hard landing for the economy. The real estate market crisis is disturbing the banks through the credit mechanism. Banks are less willing to lend when distress over loan returns increases. This is largely due to the lack of collateral. At the same time, the stress of economic actors in terms of cash situation is increasing. Because a large economy actor, who has difficulty in paying his debts, accumulates risks in terms of the general condition of goods and service providers.

 

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It is very likely that the PBOC will further lower interest rates to spur credit expansion, while the government will further increase investment to support growth. The cyclic slowing effect continues with the following conditions.

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