China is experiencing signs of entering a liquidity trap, despite efforts like low interest rates, ample bank liquidity, and increased credit. The country’s economy grew by 4.3% in the second quarter of 2026, falling short of the annual target of 5%. This growth marks the slowest quarterly expansion in almost three and a half years, according to the Dunham report.
Despite the People’s Bank of China’s monetary easing and encouragement for banks to lend more, the economy is not responding as expected. A liquidity trap occurs when interest rates are low, banks have excess funds to lend, but consumers and businesses are hesitant to borrow or spend. In such a scenario, additional liquidity fails to boost economic activity effectively.
Recent economic data from China indicates a concerning trend. While the country’s money supply grew by 8.6% year-on-year, and banks issued significant new loans, domestic demand remains weak. Consumers are more inclined to save rather than spend, even with lower borrowing costs, as surveys show over 80% prefer saving over consumption.
Despite benchmark lending rates being at record lows, consumer confidence remains fragile. The one-year loan prime rate is at 3%, and the five-year mortgage-linked rate stands at 3.5%. The continuous decline in China’s property market, with home prices falling for the 36th consecutive month, has further dampened consumer sentiment.
The prolonged property market downturn has a significant impact on consumer confidence, as nearly 70% of household wealth in China is tied to real estate. This sustained correction has led to reduced consumer confidence and a decrease in discretionary spending, affecting the overall economic outlook.
