China’s new multibillion-dollar bailout exposes a deeper problem: People are losing faith in the future

It says something about China’s consumer economy when even Ikea finds the market too uncomfortable. The Swedish furniture chain, known for its large stores and affordable products, closed seven megastores in China this year, its biggest retreat since entering the country in 1998.

When Chinese consumers stop spending, banks feel the pressure too. Beijing is now stepping in with about $54 billion to stabilize the financial system. The money will mainly come through capital increases led by the Finance Ministry. Among the beneficiaries are some of the country’s largest financial institutions, including Industrial and Commercial Bank of China and Export-Import Bank of China. Insurers, including China Life, are also receiving support, in an expansion of the rescue effort.

The capital injections should allow banks to issue more loans. China already gave its four biggest banks about $72 billion last year. This year’s package also aims to strengthen insurers and encourage them to buy domestic assets, giving them a larger role in institutional financial markets.

The scale of the intervention appears paradoxical. The World Bank judged in July that China’s banking sector was well capitalized and had adequate reserves. Yet lending margins fell to a record low in the first quarter, while insurers faced similar profitability problems and a more strained financial position.

Low interest rates sit at the center of the problem. Banks and insurers can charge less for loans and policies, while Chinese consumers show little interest in new borrowing, insurance or spending generally. In theory, cheap financing should encourage households and companies to borrow. In practice, demand remains weak.