China cuts lending rate as economic data disappoints and Covid cases rise

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China has cut a crucial lending rate in a bid to support growth as the world’s second-largest economy is rocked by repeated coronavirus lockdowns and a worsening housing crisis.

The People’s Bank of China on Monday cut its medium-term lending rate, for one-year loans to the banking system, by 10 basis points to 2.75%, the first cut since January. Analysts expected the central bank to leave the rate unchanged.

The decision highlighted mounting anxiety in Beijing as it tries to tackle a drop in consumer demand triggered by its long zero-Covid policy, as well as the fallout from property developers running out of money. money and slowing global growth.

Official statistics released on Monday reflect worse-than-expected consumer and factory activity and rising youth unemployment to a record high of 19.9 percent, putting further pressure on Xi Jinping’s administration to reinvigorate the economy. economy.

Retail sales, an important indicator of consumption, rose just 2.7% year on year in July against a forecast of 5%, while industrial production rose 3.8% against a forecast of 4.6%.

Despite Beijing’s plans to inject hundreds of billions of dollars in stimulus to spur growth, China’s economy only narrowly escaped a contraction in the second quarter.

Experts expect China’s economic slowdown to prompt looser monetary policy and fiscal stimulus, but some are pessimistic about the scale and speed of Beijing’s response.

“China’s growth in [the second half] will be significantly hampered by its zero Covid strategy, the downward spiral in property markets and a likely slowdown in export growth,” said Ting Lu, Nomura’s chief China economist. “Beijing’s political support may be too weak, too late and too ineffective.”

Analysts added that the rate cut was an important signal that Beijing would continue its efforts to stimulate the economy via monetary policy rather than focus on raising prices, after the PBoC highlighted risks of inflationary pressure. growing in its quarterly report last week.

“I would say the MLF cut is a way to ensure continued support from Beijing,” said Jing Liu, chief economist for Greater China at HSBC, adding that some had thought last week’s report was “ the beginning of monetary tightening” in the world. greater economy.

Societe Generale called the July data “simply bad”, with a deceleration in production, investment and consumption “under the crushing weight of the zero-Covid policy” and with the “housing sector free fall”.

“Policymakers have started to raise concerns about overstimulating the economy with too much liquidity, when the real risk is exactly the opposite in our view – too little easing and too weak a recovery” , the bank’s analysts said.

Xi’s zero Covid policy – which institutes strict lockdowns wherever virus outbreaks are discovered – is putting further pressure on the outlook.

Several Chinese cities, including Haikou on the southern island of Hainan, as well as Urumqi in the western region of Xinjiang, have imposed or extended lockdown restrictions in some areas as cases rise across the country over the weekend .

Hainan’s lockdown has sparked small-scale protests among tens of thousands of travelers who have been stranded in the tourist destination.

In Shanghai, authorities are testing the use of drones to ensure residents scan their health codes when entering buildings. The health code is recorded on a mandatory smartphone app that determines whether individuals can travel based on their exposure to Covid-19.

“China is definitely in a very desperate situation,” said Xingdong Chen, chief China economist at BNP Paribas. “The problem now is that there is no effective demand. If you don’t allow people to go out and consume. . . there is no demand. »

Additional reporting by Gloria Li and Primrose Riordan in Hong Kong

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