China unexpectedly cuts interest rates as economic data disappoints

China’s central bank surprisingly cut interest rates on Monday to revive demand, as data showed the economy slowed unexpectedly in July, with factory and retail activity pressured by Beijing’s zero-Covid policy and a housing crisis.

The grim numbers suggest the world’s second-biggest economy is struggling to shake off the June quarter’s slump in growth amid tough Covid restrictions, prompting some economists to downgrade their forecasts.

Industrial production grew 3.8 percent in July from a year earlier, according to the National Bureau of Statistics (NBS), below the 3.9 percent expansion in June and a 4.6 percent increase, according to analysts in a Reuters -Survey was expected.

Retail sales, which only picked up again in June, rose 2.7 percent year-on-year, missing forecasts for 5 percent growth and the 3.1 percent growth recorded in June.

“July data suggests the post-lockdown recovery slowed as the one-off boost from reopening petered out and mortgage boycotts triggered renewed deterioration in the property sector,” said Julian Evans-Pritchard, senior China economist at Capital Economics .

“The People’s Bank of China is already responding to these headwinds by beefing up support… But with credit growth proving less responsive to policy easing than in the past, it likely won’t be enough to prevent further economic weakness .”

Local stocks gave up earlier gains after the data as the yuan weakened to a one-week low against the dollar and the Australian and New Zealand currencies retreated from recent two-month highs.

China’s economy narrowly escaped a contraction in the June quarter, hampered by the lockdown in the commercial hub of Shanghai, a deepening downturn in the real estate market and continued weakness in consumer spending.

There are still many risks as many Chinese cities, including manufacturing hubs and popular tourist spots, imposed lockdown measures in July after new outbreaks of the more transmissible Omicron variant were detected.

The housing sector, further shaken by a mortgage boycott that weighed on buyer sentiment, deteriorated in July. Home investment fell 12.3 percent in July, the fastest rate this year, while the fall in new sales deepened to 28.9 percent.

Nie Wen, Shanghai-based economist at Hwabao Trust, cut his forecast for third-quarter gross domestic product growth by 1 percentage point to 4-4.5 percent after weaker-than-expected data. “Now it looks increasingly difficult to even achieve the 5-5.5 percent growth in the second half.”

The central bank unexpectedly cut interest rates on key lending facilities on Monday for the second time this year in a bid to boost growth.

Chinese policymakers are trying to balance the need to shore up a fragile recovery and root out new Covid clusters. As a result, the economy is expected to miss its official growth target of around 5.5 percent this year for the first time since 2015.

Fu Linghui, NBS spokesman, attributed the July weakness to sporadic Covid outbreaks and heatwaves in southern China, which hurt activities amid a slowing global economic recovery and high inflation.

In eastern Zhejiang province, the city of Yiwu, a major global supplier of small and cheap products, has struggled with Covid-related disruptions since July. Many parts of the city have been thrown into an extended lockdown since August 11th.

“We have stopped factory production since the city imposed a ‘quiet mode,'” said a sales manager at a factory in Yiwu that produces consumer goods.

Fixed investment, which Beijing hopes will offset slower exports in the second half, grew 5.7 percent in the first seven months of the year from the same period last year, versus a forecast increase of 6.2 percent and a drop of 6.1 percent January-June.

The employment situation remained fragile. The nationwide survey-based unemployment rate fell slightly to 5.4 percent in July from 5.5 percent in June, although youth unemployment remained stubbornly high, reaching a record 19.9 percent in July.

The rate cut and weak activity data come after official figures on Friday showed new yuan lending fell more-than-expected in July as businesses and consumers wary of borrowing.

However, Wang Jun, director of the China Chief Economist Forum, sees limits to further stimulus and believes authorities will instead focus on implementing existing policies even if economic weakness continues.

“We now face a typical liquidity trap problem. No matter how loose the credit supply, businesses and consumers are wary of taking on more debt,” Wang said. “Some of them are now even prepaying their debts. That could herald a recession.” China unexpectedly cuts interest rates as economic data disappoints

Fry Electronics Team

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