Faced with Evergrande Crisis, Beijing Cuts Rates and Supports Real Estate

Beijing lowered the reserve rate requirement for banks on Monday and reaffirmed its support for the real estate sector, shaken by the financial setbacks of giant developer Evergrande. China was the only major economy last year to have positive GDP growth (2.3%), despite the health crisis that ravaged the global economy. The country has largely recovered from the initial shock of the pandemic, but small sporadic outbreaks of Covid-19 nevertheless continue to disrupt activity. The recovery is also being dampened by a sharp rise in commodity prices and a real estate crisis with the setbacks of promoter Evergrande, who is on the brink of bankruptcy.

The heavyweight private sector, crumbling under some €260 billion in debt, has struggled for several months to meet its interest payments and apartment deliveries. The situation of the 200,000-employee group is being scrutinized with concern as the potential collapse could stunt the Asian giant’s growth and lead to social unrest. Evergrande’s setbacks undermine the confidence of potential buyers and by extension that of other property developers, who in turn find themselves in a delicate financial situation.

Also read: At Jurong, a mega-resort in Evergrande that looks like a ghost town

Statements Considered “Positive”

During a Monday meeting devoted to the economy, the political bureau of the ruling Chinese Communist Party (CCP) announced its “support” for the real estate sector. “It is necessary to promote the construction of affordable housing, to support the market […] and promote healthy development of the real estate sector,” the minutes of the meeting chaired by China’s number one, Xi Jinping, read.

These statements from Beijing to the sector on Monday are “positive” and contrast with previous criticisms of power over real estate speculation, notes economist Zhiwei Zhang at Pinpoint Asset Management. Concerned about mounting debt in the real estate sector, authorities last year imposed prudential ratios on key promoters to reduce their reliance on loans. This tightening of regulations marked the beginning of financial worries for Evergrande. Real estate and construction have played a key role in the recovery after the pandemic. They weigh more than a quarter of the Asian giant’s GDP and serve as locomotives for many other sectors, such as steel or furniture.

Also read: In China, Evergrande’s rescue has quietly begun

Lower reserve ratio

Amid slowing growth, China will also lower the reserve requirement for banks, ie the proportion of deposits they must hold in their treasury. This interest rate will be reduced by 0.5 points from December 15, the country’s central bank announced on Monday. The move aims to ease the pressure on financial institutions to encourage them to extend more credit, on more favorable terms, to businesses – and ultimately to support the economy. According to the central bank, this decision should make it possible to inject 1,200 billion yuan (166 billion euros) into the economy over time.

Lowering the reserve “will limit the slowdown, but not prevent it,” said Capital Economics analyst Julian Evans-Pritchard, arguing the measure was insufficient. The last reduction in the reserve requirement dates from July, when it was the first of the year. But the spread of the Omicron strain of Covid-19 around the world threatens the global recovery. And if mainland China has not yet identified a case of this variant, the country remains highly dependent on exports for its economy, at a time when borders are closing.

Given the worsening health situation, the International Monetary Fund (IMF) said on Friday it is considering lowering global growth forecasts. For China, the IMF is currently forecasting an 8% increase in gross domestic product this year.

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