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BEIJING/SHANGHAI, Aug 15 (Reuters) – China’s central bank cut key lending rates on Monday in a surprise move to revive demand as data showed the economy unexpectedly slowed in July, with factory and retail activity compressed by Beijing’s zero-COVID policy and a housing crisis.

The grim set of numbers signaled the world’s second-largest economy is struggling to shake off the June quarter growth hit from tight COVID restrictions, prompting some economists to cut their forecasts.

Industrial production grew 3.8% in July from a year earlier, according to the National Bureau of Statistics (NBS), down from June’s 3.9% expansion and an increase of 4, 6% expected by analysts in a Reuters poll.

Retail sales, which just returned to growth in June, rose 2.7% from a year ago, missing forecasts of 5.0% growth and June’s 3.1% growth.

“July’s data suggests that the post-lockdown recovery lost steam as the one-time boost from reopening faded and mortgage boycotts led to a further 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 increasing support… But with credit growth less sensitive to policy easing than in the past, this will likely not be enough to avoid further economic weakness”.

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

China’s economy narrowly escaped a contraction in the June quarter, hampered by the blockade of Shanghai’s commercial hub, a deepening slump in the property market and persistently soft consumer spending.

Risks still abound 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 of the coronavirus were found. Read more

The real estate sector, which has been further shaken by a mortgage boycott that weighed on buyer sentiment, deteriorated in July. Home investment fell 12.3% last month, the fastest rate this year, while the drop in new sales deepened to 28.9%.

Nie Wen, Shanghai-based economist at Hwabao Trust, cut his third-quarter gross domestic product growth forecast by 1 percentage point to 4-4.5%, after weaker-than-expected data .

ING also cut its forecast for China’s GDP growth in 2022 to 4% from 4.4% previously, and warned that a further cut is possible, depending on the strength of exports.

BALANCE ACT

To shore up growth, the central bank unexpectedly cut interest rates on its main lending facilities for the second time this year on Monday. Analysts expect the cut is likely to lead to a corresponding reduction in benchmark lending rates next week. Read more

Many believe the scope for the People’s Bank of China to further ease policy could be limited by concerns about capital outflows as the U.S. Federal Reserve and other economies aggressively raise interest rates to fight against rising inflation.

“Very sluggish credit demand in July due to weak activity growth, deteriorating real estate indicators and lower-than-expected CPI inflation may have contributed to the PBOC’s move,” analysts at Goldman Sachs.

“Going forward, whether the PBOC would cut interest rates again could depend on the data in our view.”

Official figures on Friday showed new yuan loans fell more than expected in July as businesses and consumers remained cautious about borrowing. Read more

Chinese policymakers are trying to balance the need to foster a fragile recovery and eradicate new clusters of COVID-19. As a result, the economy is expected to miss its official growth target this year, set at around 5.5%, for the first time since 2015. read more

In the eastern province of Zhejiang, the city of Yiwu, a key global supplier of small and cheap products, has been struggling with disruptions related to COVID-19 since July. Since August 11, many parts of Yiwu have been thrown into a prolonged lockdown.

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

Investment in fixed assets, which Beijing hopes will offset a slowdown in exports in the second half, grew 5.7% in the first seven months of 2022 from the same period a year earlier, compared with a forecast of increase of 6.2% and a decrease of 6.1% in January. – June

The employment situation remained fragile. The national survey unemployment rate eased slightly to 5.4% in July from 5.5% in June, although youth unemployment remained stubbornly high, reaching a record 19.9 % in July.

“In our view, China’s growth in the second half will be significantly hampered by its zero-COVID strategy, the deterioration of the real estate sector and a likely slowdown in export growth,” Nomura analysts said.

“Political support from Beijing could be too little, too late and too inefficient.”

Reporting by Kevin Yao, Stella Qiu, Ellen Zhang, Winni Zhou and Beijing Newsroom; Editing by Sam Holmes

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