China Encourages Spending Over Saving Amidst Flagging Economy

Why It Matters

Policymakers throughout China have the option to lower deposit rates as a means of incentivizing spending. The lower rates should motivate people to consider investing or spending the money rather than having savings in their bank account.

This act shows that consumer spending, which is necessary for economic growth, has not yet returned to its pre-COVID levels despite the lifting of restrictions. While pent-up demand may have led people to return to some sectors of the economy, the rate of recovery varies.

Larry Hu, the chief China economist at Macquarie Group, believes that this rate change is just one lever that will help stimulate the economy. He predicts that the People’s Bank of China will make a benchmark lending rate cut or take other measures that boost the economy in the upcoming months. When China’s central bank lowers the lending rate, banks can counteract some of that pressure by lowering the payout on deposits.

Background

China anticipated a 5% GDP growth by 2023, although the country’s current trajectory appears insufficient for their economy to reach that goal. While the first three months of 2021 saw 4.5% economic growth, there is less hope for the next quarter. In particular, young people have a record-high unemployment rate, and the real estate market is in a slump with no recovery in sight.

Betty Rui Wang, a senior China economist at ANZ, identified weak economic confidence among Chinese households and businesses. Wang credits post-COVID demand for economic growth in the first half of the year, but she thinks that starts to drop off after May. “It’s losing momentum,” she said.

What’s Next

Many economists and analysts anticipate new stimulus measures following the Politburo meeting next month. To stimulate car sales, the Ministry of Commerce recently launched infrastructure initiatives for electric vehicle charging stations in rural areas.

Li You contributed research.