China ‘recession’ risk sparks ‘unease’ in economic circles, with warnings of quarterly slowdowns

Consumption outlook in year’s second half ‘remains pessimistic’, and capital outflow could result in ‘yuan depreciation’ and give rise to asset bubbles

Bearish economist says China is in late-stage stagflation and warns that real estate and exports will drag on the economy in the coming months

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The People’s Bank of China will slash the reserve requirement ratio by 0.5 percentage points on Thursday, unleashing 1 trillion yuan (US$154 billion) worth of liquidity into the interbank system. Photo: Bloomberg

Published: 8:38pm, 12 Jul 2021Updated: 11:02pm, 12 Jul 2021

A surprising move to cut the banking system’s reserve requirement ratio (RRR) signals looming headwinds of a potential recession for China’s economy while further widening a divergence from Washington’s pro-tightening economic stance, according to economists.

The People’s Bank of China will slash the RRR by 0.5 percentage points on Thursday, unleashing 1 trillion yuan (US$154 billion) worth of liquidity into the interbank system, with the primary aim of using more credit to help support small, cost-pressured domestic businesses. It is the first such cut in 15 months.

But the move has left some economists wary on the nation’s economic outlook. Some have predicted that gross domestic product (GDP) will grow by 5 to 6 per cent in the second half of 2021, year on year, after first-quarter growth jumped 18.3 per cent – albeit against a low base comparison with last year when the coronavirus pandemic resulted in widespread lockdowns.

Ren Zeping, chief economist at Soochow Securities, said that the “window of China’s monetary easing cycle” is opening amid weakening economic momentum.

China’s slowdown stems from weak consumer spending and because small and medium-sized firms – the nation’s biggest employers – are struggling with the high cost of raw materials and reduced production. A surge in commodity prices pushed factory-gate inflation to 9 per cent in May – the highest in 13 years. It dipped slightly to 8.8 per cent in June.