China resorted to a surprise interest rate cut on Monday after the key macroeconomic data for July fell below analysts’ expectations and raised fresh concerns about growth prospects in the world’s second-biggest economy.
In an effort to provide support to the Chinese economy, the People’s Bank of China (PBOC) has reduced the interest rates on both one-year medium-term lending facility and seven-day reverse repurchase agreements by 10 basis points, while injecting fresh liquidity through the two instruments.
The interest rate for a one-year medium-term lending facility has been reduced to 2.75% while that of the seven-day repurchase agreements has been reduced to 2%. Incidentally, the PBOC had cut both the rates by 10 basis points in January.
The PBOC also injected fresh liquidity worth 400 billion Chinese Yuan (US $59.3 billion) into the system via the one-year medium-term lending facility and 2 billion Chinese Yuan via seven-day reverse repo on Monday.
The latest interest rate cuts may lead to a lowering of the benchmark lending rates in China, as the latter is usually based on the basis of the prevailing rate of the medium-term lending facility. New bank lending in China dropped more than expected in July, as fresh flare-ups of Covid-19 cases, job concerns, and deepening property crisis made companies and consumers wary of taking on more debt.
Retail sales in China grew by 2.7% in July, down from 3.1% in June and well below the 5% growth forecast by analysts in a Reuters poll of 32 respondents. Sales of automobiles, one of the largest categories by value, rose by 9.7% while sales of catering, furniture, and construction-related products declined during the period. Fresh outbreaks of Covid-19 cases in China weighed in on the spending patterns of consumers and businesses.
Industrial production grew by 3.8%, down from 3.9% in June, and also missed analysts’ forecast of 4.6%. Fixed assets Investments rose by 5.7% during the first seven months of the calendar year, which missed the forecast of 6.2% growth. Real estate investments in China fell faster in July than in the preceding month, while investments in manufacturing slowed during the period.
The massive real estate sector in China suffered this summer because many homebuyers halted their mortgage payments to protest against developer delays in constructing homes, which were typically sold in China ahead of completion. This deterioration of confidence among homebuyers has put future sales, an important source of cash flow, for the developers at risk.
The disappointing economic data and growth prospects in China were further exacerbated by high unemployment numbers. The unemployment rate in China across all ages in cities was 5.4% while the unemployment rate among Chinese aged between 16 to 24 was a high 19.9%.
China’s strict ‘Zero Covid’ policy made it difficult to sustain its stellar economic growth of the past, as the threat of repeated restrictions and re-opening loomed large in the minds of its people. It hit the services sector badly and dampened household consumption in China.
China’s top leaders hinted at a meeting in July that the country might miss its goal for GDP growth of 5.5% this year. A Bloomberg poll of economists forecasts the Chinese economy to grow by 3.8% this year.
China is often touted as the ‘world’s factory’ due to its low-cost and industrial-scale manufacturing prowess. Now all the data, when put together, indicated that China would continue to struggle to provide support to much of the world economy for the rest of the year.
Author - Kaustav Roy
World Business Reporter - View All Articles
Kaustav is a freelance journalist covering business news from around the world. Kaustav joined InterSpaceReporter as a freelance journalist on Monday 15th August 2022.