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China’s Central Bank to Bolster Economy Amidst Weakening Domestic Demand and Increased Risks

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China’s central bank, the People’s Bank of China (PBOC), has announced plans to provide additional support to the country’s economy in response to weakening domestic demand, business struggles, and increased risks in key areas.

Increased Financial Support for Shantytown Renovation and Affordable Housing

In its second-quarter monetary policy report, the PBOC stated that it would enhance financial support for shantytown renovation projects and affordable housing initiatives, with a particular focus on catering to low-income residents in Chinese cities. This move builds upon China’s nationwide shantytown program, launched in 2014, which successfully revitalized the real estate market by boosting home sales and prices in smaller cities that had long been burdened by an excess of unsold homes. At that time, this initiative played a crucial role in reviving China’s overall economic growth.

Extending Loan Support for Unfinished Homes

The central bank also announced that it would extend loan support for unfinished homes until the end of May next year. This decision comes as property developers continue to face challenges due to high debt levels. In 2021, Beijing implemented measures to reduce leverage in the property sector, which limited funding sources for developers and resulted in many incomplete homes. This issue sparked widespread protests among homebuyers.

Addressing Deflation Concerns and Currency Stability

The PBOC expressed confidence in the recovery of China’s consumer price index (CPI) following its dip into deflation territory in July. The central bank expects the CPI to rebound in August and shape a U-curve trajectory throughout the year. Additionally, the PBOC emphasized that China has no basis for long-term deflation, dismissing concerns regarding deflationary pressures.

To mitigate the risk of the yuan’s exchange rate overshooting, the PBOC pledged to maintain the stability of the Chinese currency. The recent reduction of key policy rates by the central bank resulted in the yuan weakening to its lowest level this year in offshore trading. However, the PBOC aims to prevent any excessive depreciation that could potentially destabilize the economy.

Coordination of Financial Support for Local Government Debt

Another area of focus mentioned by the PBOC is the coordination of financial support to tackle risks associated with local government debt. As part of its efforts to maintain stability and manage potential financial vulnerabilities, the central bank aims to address these specific concerns.

In conclusion, China’s central bank has unveiled a range of measures to bolster the economy and mitigate risks amidst weakening domestic demand and challenges faced by businesses. These actions aim to enhance various sectors, including shantytown renovation, affordable housing, and addressing unfinished homes. Moreover, the PBOC remains optimistic about the recovery of the consumer price index, while also emphasizing its commitment to currency stability and addressing local government debt risks.

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