China has cut a crucial lending rate in an effort to shore up growth as the world’s second biggest economy is buffeted by repeated Covid lockdowns and a worsening property crisis.
The People’s Bank of China (PBoC) on Monday reduced its medium-term lending rate, for one-year loans to the banking system, by 10 basis points to 2.75 per cent, the first cut since January. Analysts had expected the central bank to leave the rate unchanged.
The decision highlighted deepening anxiety in Beijing as it tries to combat a decline in consumer demand triggered by its drawn out zero-Covid policy as well as the fallout from cash-strapped property developers and slowing global growth.
Official statistics released on Monday reflected worse than expected consumer and factory activity and a rise in youth unemployment to a record 19.9 per cent, piling more pressure on Xi Jinping’s administration to reinvigorate the economy.
Retail sales, an important gauge of consumption, rose only 2.7 per cent year-on-year in July compared to a forecast 5 per cent, while industrial production was 3.8 per cent higher compared to a forecast 4.6 per cent.
Despite Beijing’s plans to inject hundreds of billions of dollars of stimulus to boost growth, China’s economy only narrowly escaped a contraction in the second quarter.
Experts expect China’s economic slowdown to prompt looser monetary policy and fiscal stimulus, but some are pessimistic about the scale and speed of Beijing’s response.
“China’s growth in [the second half] will be significantly hindered by its zero-Covid strategy, the downward spiral of the property markets and a likely slowdown of export growth,” said Ting Lu, Nomura’s chief China economist. “Beijing’s policy support could be too little, too late and too inefficient.”
Analysts added that the rate cut was an important signal that Beijing would maintain efforts to stimulate the economy via monetary policy rather than pivoting to focus on rising prices, after the PBoC highlighted the risks of growing inflationary pressure in its quarterly report last week.
“I would say the MLF cut is a way to pledge Beijing’s continued support,” said Jing Liu, chief economist for greater China at HSBC, adding that some had thought last week’s report was “the beginning of monetary tightening” in the world’s second largest economy.
Société Générale described the July data as “simply bad”, with deceleration across production, investment and consumption “under the crushing weight of the zero-Covid policy” and with the “housing sector in free fall”.
“Policymakers have started to communicate their concerns about overstimulating the economy with too much liquidity, while the real risk is exactly the opposite in our view – too little easing and too weak a recovery,” the bank’s analysts said.
Xi’s zero-Covid policy – which institutes strict lockdowns wherever outbreaks of the virus are discovered – is inflicting further strains on the outlook. Several Chinese cities, including Haikou on the southern island of Hainan, as well as Urumqi in the western Xinjiang region, have imposed or extended lockdown restrictions in some areas, with cases rising nationwide over the weekend.
The Hainan lockdown has sparked small-scale protests among tens of thousands of travellers who have been left stranded in the tourist destination.
In Shanghai authorities are testing the use of drones to ensure residents scan their health codes when they enter buildings. The health code is recorded on a compulsory smartphone app that determines whether individuals can travel based on their exposure to Covid-19.
“China is definitely in a very desperate situation,” said Xingdong Chen, chief China economist at BNP Paribas. “The problem now is no effective demand. If you don’t allow people to come out and consume... there is no demand.” – Copyright The Financial Times Limited 2022