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China's Microeconomics - 22nd August 2023

China's Microeconomics - 22nd August 2023
Photo by Li Yang / Unsplash

China is the second largest economy as per annual GDP (~18 trillion US dollars). Now, let's take a look at their economies' fundamentals.

1. Deflation šŸ“‰

China's current CPI y/y rate is -0.3%. A negative CPI rate indicates deflation, which means that the general price level of goods and services is decreasing. Deflation can be harmful to the economy as it can lead to a decrease in consumer spending and investment. The reasons for China's current negative CPI rate could be due to a decrease in demand for goods and services, a decrease in production costs, or a decrease in the money supply1.

2. Interest rates šŸ“‰
  • China's current 1-y Loan Prime Rate is 3.45%.
  • China's current 5-y Loan Prime Rate is 4.20%.

The Loan Prime Rate (LPR) is the lending rate provided by commercial banks to their highest quality customers, and serves as the benchmark for rates provided for other loans.

3. Market Liquidity šŸ“ˆ

China's central bank rolled over maturing medium-term policy loans while keeping the interest rate unchanged to maintain reasonably ample banking system liquidity. Policymakers have assured that liquidity in the banking system will be kept reasonably ample2. The People's Bank of China also cut the reserve requirement ratio of Chinese financial institutions, injecting 500 billion yuan (US$72.6 billion) worth of liquidity into the market3.

Overall, the People's Bank of China is taking measures to increase liquidity in the market.