China unexpectedly lowers key rates as economic data disappoints

China’s central bank lowered key rates on Monday in a surprise move to boost demand, with data showing an unexpected slowdown in the economy in July as factory and retail activity were squeezed by Beijing’s zero Covid policy and a real estate crisis.

The grim string of numbers indicate the world’s second-largest economy is struggling to shake off the hit to June quarter growth from tough Covid restrictions, prompting some economists to revise their projections downward.

Industrial production rose 3.8% in July from a year earlier, according to the National Bureau of Statistics (NBS), below the 3.9% expansion in June and a 4 .6% expected by analysts in a Reuters poll.

Retail sales, which just returned to growth in June, rose 2.7% from a year ago, missing the 5% and 3.1% growth forecasts seen in June .

“Data from July suggests the post-lockdown recovery has run out of steam as the one-time boost from reopening faded and mortgage boycotts sparked further deterioration in the real estate sector,” said Julian Evans- Pritchard, senior China economist at Capital Economics.

“The People’s Bank of China is already reacting to these headwinds by increasing its support… But with credit growth proving less responsive to policy easing than in the past, this is unlikely to be enough to prevent further economic weakness. “

Local stocks gave up earlier gains after the data, while the yuan weakened to a one-week low against the dollar and the Australian and New Zealand currencies pulled back from their recent highs of two month.

China’s economy narrowly escaped a contraction in the June quarter, hampered by the Shanghai mall lockdown, a deepening housing market slowdown and still-weak consumer spending.

Risks still abound as many Chinese cities, including manufacturing hubs and popular tourist sites, imposed lockdown measures in July after new outbreaks of the more transmissible Omicron variant were discovered.

The real estate sector, which was further shaken by a mortgage boycott which weighed on the morale of buyers, deteriorated in July. Property investment fell 12.3% in July, the fastest rate this year, while the decline in new sales worsened to 28.9%.

Nie Wen, a Shanghai-based economist at Hwabao Trust, lowered his forecast for third-quarter gross domestic product growth by 1 percentage point to 4-4.5%, after weaker-than-expected data. “Now it looks increasingly difficult to achieve even the 5-5.5% growth in the second half.”

To support growth, the central bank on Monday unexpectedly lowered interest rates on major lending facilities for the second time this year.

Chinese policymakers are trying to balance the need to consolidate a fragile recovery and stamp out new Covid clusters. As a result, the economy is expected to miss its official growth target this year – set at around 5.5% – for the first time since 2015.

Fu Linghui, spokesman for the NBS, attributed July’s weakness to sporadic Covid outbreaks and heat waves in southern China that affected activity, amid a slowing global economic recovery and high inflation.

In the eastern province of Zhejiang, the city of Yiwu, a key global supplier of small, inexpensive goods, has been battling Covid-related disruptions since July. Many parts of the city have been plunged into an extended lockdown since August 11.

“We have stopped production at the factory since the city imposed a ‘silent mode’,” said a sales manager at a Yiwu factory that manufactures consumer goods.

Investment in fixed assets, which Beijing hopes will offset the slowdown in exports in the second half, rose 5.7% in the first seven months of the year from the same period a year earlier, against an expected rise of 6.2% and down from a jump of 6.1% in Jan-June.

The employment situation remained fragile. The national survey-based unemployment rate fell slightly to 5.4% in July from 5.5% in June, although youth unemployment remained stubbornly high, hitting a record high of 19.9% ​​in July.

The rate cut and weak activity data come after official figures on Friday showed new yuan lending fell more than expected in July as businesses and consumers remained cautious about leverage.

However, Wang Jun, director of the China Chief Economist Forum, sees limits to further stimulus and believes authorities will instead focus on implementing existing policies even if economic weakness persists.

“We are now facing a typical liquidity trap problem. No matter how weak the credit supply, businesses and consumers are cautious about taking on more debt,” Wang said. “Some of them are even repaying their debt early. This could herald a recession.”