Beijing, July 22 — Despite offering billions of dollars in loans at rock-bottom rates, China is facing severe economic challenges. Consumer sentiments are at a 30-year low, the consumer price index has hovered near zero or negative for the past eighteen months, and both stock and property prices are plummeting. As a result, citizens are turning to gold as a safe investment.

Economic recession and Deflation
China's economic landscape is marked by stagnation, recession, deflation, and a liquidity trap. Unlike other countries battling high inflation and implementing tight monetary policies, the People’s Bank of China (PBOC) is increasing money supply to stimulate spending, but with little success. Despite flooding the market with easy finance, the desired economic boost remains elusive.

In July alone, the PBOC held two special lending sessions, drastically cutting interest rates. The second session saw Beijing offering $27.5 billion in loans for one year at 2.3%, far below the policy rate of 3.4%. Despite this high degree of money supply, inflation in China was just 0.2% in May. Citizens’ confidence in the economy is waning, leading to a 46% increase in gold bar and coin purchases in the first half of 2024.

Shrinking Property Market
China's government is deploying significant funds to revive its faltering economy. In February, Beijing directed banks to finance 5,349 high-risk home development projects across 214 cities, despite a $13 trillion loan overhang in the real estate sector. In May, the central bank offered $42 billion to banks for lending to state-owned enterprises (SOEs) to purchase unsold apartments and reduced down-payment requirements for first-time homebuyers.

Despite these measures, the housing market continues to collapse. Key indicators such as sales of floor space, new home construction starts, completions, and property investments have been in steady decline. A July 2024 S&P report projected a 15% year-over-year drop in property sales, down nearly half from the 2021 peak of 18 trillion yuan.

Structural Issues and Banking Crisis
The property sector, contributing nearly a quarter of China’s GDP, is facing a significant downturn, which is impacting overall growth. Manufacturing cannot compensate for the loss due to pressures on exports and weak domestic consumption. The money pumped into the economy is not only failing to generate demand but is also damaging the financial system.

Chinese banks are collapsing at an unprecedented rate. In the week ending June 24, 2024, 40 banks disappeared, as reported by The Economist. Smaller banks are struggling with bad loans and exposure to the property crisis, with nearly 3,800 financial institutions at risk. Beijing is managing this crisis by forcing larger banks to acquire troubled smaller banks, increasing the vulnerability of the larger banks and the global financial system. The Financial Stability Board recently added five Chinese banks to its "too-big-to-fail" list, indicating their fragile asset profiles and potential global impact if they fail.

Conclusion
China’s economic troubles are multifaceted, encompassing deflationary trends, a collapsing property market, and a banking crisis. The measures taken so far, including increased money supply and large-scale lending, have yet to yield the desired economic revival. As Beijing navigates these challenges, the implications for the global financial system remain significant.