PBoC struggles in a liquidity trap, echoing the challenges of stimulating the economy during the Depression.

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In a concerning turn of events for the Chinese economy, the People’s Bank of China (PBoC) finds itself ensnared in a liquidity trap reminiscent of the challenges faced during the Depression era. Despite deploying a substantial $740 billion in cheap loans to businesses, the efficacy of this stimulus effort is faltering as banks grow wary of credit risks, and companies resist shouldering additional debt amid a slowing economy.

The targeted lending program, a linchpin of Beijing’s economic revival strategy post-COVID-19, has encountered obstacles in identifying eligible borrowers in sectors prioritized by the government. Official data reveals that half of the 14 PBoC loan programs, ranging from nursing homes to distressed real estate developers, have deployed less than 50% of their quotas since initiation in 2020. The remaining programs, termed “structural monetary policy instruments,” have disbursed between 62% and 87% of their lending quotas.

This sluggish uptake underscores the formidable challenges confronting Chinese policymakers striving to rejuvenate an economy reeling from a real estate crisis and a palpable lack of confidence in the private sector. China, as of now, remains far from experiencing a complete economic rebound to pre-pandemic levels, and projections for 2024 do not bode well.

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The Conference Board anticipates a deceleration in GDP growth to 4.1% in 2024, down from an estimated 5.2% in 2023. The lingering effects of stringent pandemic lockdowns, a struggling real estate market, and a lack of private sector enthusiasm continue to hinder China’s economic resurgence. The initial optimism of a demand-driven rebound in the first quarter of 2023 gave way to disappointment as major real estate players like Evergrande and Country Garden grappled with debt issues. A combination of aging demographics, soaring youth unemployment, and deflation further weakened the labor market, leading the nation into a troubling economic downturn.

The second quarter witnessed softer domestic and external demand for Chinese goods, a deteriorating job market, and a decline in business profits exacerbated by low inflation. GDP expansion plummeted to 0.5% on a quarter-over-quarter basis, down sharply from 2.3%, painting a worrisome picture of China’s economic landscape as it grapples with the persistent challenges of the liquidity trap.

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