China Property Sector Support

Beijing recently increased support for the struggling property sector, a key factor in China’s economic slowdown. However, this move did not have the desired impact on stocks, highlighting the underlying structural issues in the world’s second-largest economy.

Rate Cut by The People’s Bank of China

The People’s Bank of China made a significant cut in the benchmark lending rate on Tuesday, reducing the five-year loan prime rate to 3.95%. This marked a 25 basis points decrease, the first since June 2023, and the most aggressive cut since its introduction in 2019. Economists were surprised by this larger cut, expecting only a 15 basis points reduction.

Challenges in the Real Estate Sector

China’s vast and heavily indebted real estate sector plays a crucial role in the country’s economic slowdown, which has had a ripple effect on global markets. Several property firms, including Evergrande, once the largest developer in China, have faced financial difficulties, leading to defaults and bankruptcies. The distress in the industry not only threatens household wealth but also poses a risk to the broader financial system.

Chinese Stimulus Fails to Impress Market

While even rumors of Chinese stimulus have helped stocks shoot up in the past, the PBOC’s substantial move was met with a muted response. It may be that such an aggressive rate cut looks a little desperate, with officials failing to toe the line between sufficient stimulus to inspire confidence and too much so as to raise hackles.

Concern in Beijing

“It shows Beijing is concerned,” said Neil Wilson, an analyst at broker Finalto.

Both Hong Kong’s Hang Seng Index and the Shanghai Composite spent much of Tuesday in the red before eking out gains, with the indexes rising 0.6% and 0.4%, respectively. The Hang Seng Properties index advanced 0.7%, perhaps a milder reaction than expected. There was little support for widely held Chinese stocks, such as Alibaba —the U.S.-listed shares of which fell 0.4% in the premarket, tracking a decline in futures tracking the S&P 500.

Lack of Confidence

“The sharper-than-expected cut hasn’t done the trick of shoring up confidence,” said Susannah Streeter, an analyst at broker Hargreaves Lansdown. “The fragility of China’s economy is weighing on minds as the country remains mired in a real estate slump with the latest attempt to stimulate demand highlighting the depths of the problems.”

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