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Key economic data in China again fell short of expectations in July. According to official data from Beijing’s National Bureau of Statistics (NBS), retail sales growth slowed to 2.7% from a year earlier; analysts had expected 4.3%. Industrial production also grew at a slower 3.8% year-on-year, compared with the expected 4.3%.
To boost the economy, China’s central bank now surprisingly cut both one-year and seven-day lending rates by 10 basis points. On Monday, the People’s Bank of China (PBOC) said it was lowering the rate on 400 bn yuan ($59 bn) on one-year, medium-term lending facility loans to some banks to 2.75% from 2.85%. The central bank is also cutting the borrowing cost of its 7-day reverse repo rate from 2.10% to 2.00%. It is a key interest rate at which it provides short-term liquidity to banks.
Economists doubt that this move will have much impact, as households and businesses are currently rather reluctant to borrow. In July, new loans rose at the slowest pace in at least five years.
“The economy’s downward cycle is not just coming from lower demand for home sales and fewer home-building activities. It is due to a broad-based slowing in retail sales, industrial production and fixed-asset investments,” writes Iris Pang, chief economist, Greater China, at ING.
What is more, according to Pang is that semiconductor production fell 16.6% year-on-year. “This confirms that the industry is entering a downward cycle as global demand for smart devices is going to be lower than in previous years. This makes up a big part of exports not only for Mainland China but also for other Asian economies,” says Pang.
Fixed-asset investment rose 5.7% in the first seven months of the year, also below the 6.2% forecast by economists. Real estate investment fell 6.4% during the period.
“Too little, too late”
“Beijing’s policy support could be too little, too late and too inefficient,” wrote Ting Lu, Nomura’s chief China economist in a note. “We think markets are too optimistic about growth in the second half, and we expect a new round of cuts of growth forecasts in coming weeks.”
China’s downward trajectory began in March with a new wave of Covid-19 cases and subsequent weeks-long lockdowns. In June, the world’s second-largest economy posted its weakest quarterly growth in two years. The economy grew just 0.4% compared to the second quarter of 2021.
At the July meeting of the Politburo, the Communist Party’s top decision-making body, there had already been indications that China did not expect to meet the set target of 5.5% economic growth for this year – even if they did not officially say so.
Despite the negative impact on the economy, there is little sign that Beijing will back away from its “zero-Covid” policy. A few days ago, health authorities ordered further lockdowns nationwide, including on the popular tourist island of Hainan, to curb repeated outbreaks of the highly contagious Omicron variant.
“Observers of the Chinese market suggest an easing of the zero-Covid policy following the party congress in autumn, but that remains a matter of conjecture,” writes the Asian Equity Team of Nikko Asset Management. “What is clear are the areas the government is focused on for the longer term – greater self-reliance particularly in technology supply chains, a transition towards cleaner energy through greater energy security and ‘common prosperity’ through better healthcare and greater wealth distribution.”
