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China’s retail sales rose by 2.7 per cent in July, well below an expected rise of 5.3 per cent and down from 3.1 per cent growth in June. Photo: Bloomberg

China’s interest rate cut signals ‘policy easing’ as July retail sales, industrial output fall short of estimates

  • Central bank moves to give China’s economy a shot in the arm with 10-basis-point cut to one-year medium-term lending facility for the first time since mid-January
  • Major data points for retail sales and fixed-asset investment saw growth in July, but the level was down from June and results failed to meet analysts’ expectations

The retreat of China’s major economic parameters last month may have poured cold water on Beijing’s hope that the recovery momentum would be consolidated and that growth will get back on track in the third quarter, forcing policymakers to step up the use of stabilisation tools.

The economic data, which largely fell short of market expectations on Monday, highlights the uncertainties lying ahead for the world’s second-largest economy in the face of coronavirus outbreaks, deeper property-market adjustments, possible stagflation in the global economy, and an intensifying rivalry with the United States.

With China’s central bank cutting a major policy interest rate by 10 basis points on Monday – the first cut since mid-January – analysts are expecting Beijing to use price tools, coupled with a credit boost and infrastructure push, to quickly drive up domestic demand before a leadership reshuffling at this autumn’s 20th Party Congress.
The impact of the stimulus rolled out in May-June has proved weaker than expected, prompting policymakers to step up policy easing
Larry Hu, Macquarie Group
Industrial production, a gauge of activity in the manufacturing, mining and utilities sectors, rose by 3.8 per cent in July, year on year, the National Bureau of Statistics (NBS) said on Monday. It was down slightly from 3.9 per cent growth in June.

Retail sales rose by 2.7 per cent in July, well below an expected rise of 5.3 per cent and down from 3.1 per cent growth in June.

The urban surveyed jobless rate, an imperfect measurement of unemployment in China that does not include figures for all of the nation’s tens of millions of migrant workers, stood at 5.4 per cent in July from 5.5 per cent in June. The jobless rate for the 16-24 age group set another record high at 19.9 per cent last month.

“The impact of the stimulus rolled out in May-June has proved weaker than expected, prompting policymakers to step up policy easing,” said Larry Hu, chief China economist with Macquarie Group.

The State Council has pinned some of its hopes for an economic recovery on infrastructure construction and the issuance of special purpose bonds, as the nation’s gross domestic product grew by only 0.4 per cent in the second quarter amid large-scale coronavirus lockdowns.

As a decline in the property market has exerted significant pressure on the economy, policymakers have to further lower the mortgage rate to stabilise the sector, Hu said.

January-July infrastructure investment growth expanded to 9.6 per cent, from 9.3 per cent in the first six months, thanks to Beijing’s infrastructure boost and credit support. This, however, was dragged down by property investment, which fell 6.4 per cent in the January-July period, compared with a smaller decline of 5.4 per cent from January-June.

Fixed-asset investment, which Beijing has relied on this year to stem downturn risks, rose by 5.7 per cent in the first seven months, year on year, down from a rise of 6.1 per cent in the first six months of the year.

02:30

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Julian Evans-Pritchard, a senior China economist with Capital Economics, warned that the latest economic data suggested that China’s post-lockdown recovery lost steam as the temporary boost from reopening fizzled out.

“We think the outlook will remain challenging in the coming months as exports turn from tailwind to headwind, the property downturn deepens, and virus disruptions remain a recurring drag,” he wrote in a note.

Zhang Zhiwei, chief economist with Pinpoint Asset Management, said: “Domestic demand softened due to Covid outbreaks in many cities and the worsening sentiment in the property market.”

“The trouble in the property market is getting worse, as suspended construction in some projects makes homebuyers hesitant to purchase new homes,” Zhang added.

Before Monday’s data release, the People’s Bank of China cut the rate of the one-year medium-term lending facility (MLF), a key policy interest rate, by 10 basis points to 2.75 per cent from 2.85 per cent, as the central bank moved to boost economic activities.

The MLF rate cut will generally pass on to the loan prime rate, which will be released by the Chinese central bank next week. The five-year prime rate is a key reference to the mortgage rate offered by commercial banks.

Golden Credit Rating analyst Wang Qing said that lowering fundraising costs will be an important tool to boost demand in the real economy in the second half of this year.

“Particularly, lower mortgage rates will be key to reversing market expectations and recovering the property market,” he said.

Beijing has been watching economic data closely and has already ruled out an all-out stimulus. At the late-July Politburo meeting, Chinese leaders reiterated the importance of striking a balance between growth, pandemic control and development security – softening its tone on achieving an “around 5.5 per cent” annual growth target, but vowing the best outcome possible.
It may be time to re-evaluate the economic situation, as it didn’t recover as optimistically as the Politburo had thought in July
Ding Shuang, Standard Chartered Bank

NBS spokesman Fu Linghui said at a press conference on Monday that authorities would focus on expanding domestic demand and stabilising employment and prices to keep major economic indicators “within an appropriate range”.

“We must be aware that stagflation risks in the world economy are increasing, and the foundation for the recovery of the domestic economy is yet to consolidated,” Fu said.

Ding Shuang, chief Greater China economist with Standard Chartered Bank, viewed the policy rate cut as a sign that monetary policy will continue to loosen, but said its boost will be limited because of the weak demand.

“It may be time to re-evaluate the economic situation, as it didn’t recover as optimistically as the Politburo had thought in July,” he said, adding that weak “market expectations haven’t yet been reversed”.

China also continues to face new coronavirus outbreaks and their resulting lockdowns, which could affect the strength and longevity of its economic rebound.
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