Categories: Economic News

China cuts lending rate as economic data disappoints and Covid cases rise

China has cut a crucial lending rate in an effort to bolster growth as the world’s second-largest economy is hit by repeated coronavirus lockdowns and a worsening housing crisis.

The People’s Bank of China on Monday cut its medium-term lending rate, for one-year loans in the banking system, by 10 basis points to 2.75 percent, the first cut since January. Analysts had expected the central bank to leave the rate unchanged.

The decision highlighted growing anxiety in Beijing as it tries to combat a drop in consumer demand brought on by its zero-covid-19 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 percent, increasing pressure on Xi Jinping’s administration to revitalize the economy

Retail sales, a key indicator of consumption, rose just 2.7% year-on-year in July compared with a forecast of 5%, while industrial production was 3.8% higher than the 4% forecast .6%

Despite Beijing’s plans to inject hundreds of billions of dollars in stimulus to boost growth, China’s economy 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 hampered by its zero-Covid strategy, the downward spiral of property markets and a likely slowdown in export growth,” said Ting Lu, Nomura’s chief China economist. “Beijing’s political support it 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 through monetary policy rather than focusing on rising prices, after the PBoC highlighted the risks of rising inflationary pressure in its quarterly report last week.

“I would say the MLF cut is a way of pledging continued support from Beijing,” 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 second edition of the world. larger economy.

Société Générale described July’s data as “simply bad”, with output, investment and consumption slowing “under the crushing weight of the zero-Covid policy” and with the “housing sector in decline free”.

“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,” analysts at the bank 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 region of Xinjiang, have imposed or extended lockdown restrictions in some areas, with cases rising across the country over the weekend.

Hainan’s blockade has sparked small-scale protests among tens of thousands of travelers stranded in the tourist destination.

In Shanghai, authorities are testing the use of drones to ensure residents scan their health codes when entering buildings. The health code is recorded in a mandatory smartphone app that determines whether people 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 that there is no effective demand. If you don’t allow people to go out and consume . . . there is no demand.”

Additional reporting by Gloria Li and Primrose Riordan in Hong Kong


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