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China cuts interest rates to prop up faltering economy

China cuts interest rates to prop up faltering economy

 


China’s central bank lowered its key interest rate on Monday to support slowing economic growth at a politically sensitive time when President Xi Jinping is trying to extend his grip on power.

The decision suggests Beijing is temporarily shelving concerns about high debt to act to avoid a meltdown before Xi attempts to give himself a third five-year term as Communist Party leader at a meeting this fall.

The ruling party has effectively acknowledged that it cannot meet the official growth target of 5.5% this year after anti-virus measures disrupted trade, manufacturing and consumer spending. A crackdown on excessive borrowing in China’s vast real estate sector has caused a slump in home sales and construction.

The momentum of economic recovery has slowed, government spokesman Fu Linghui told a news conference. Further efforts are needed to consolidate the foundations for economic recovery.

The People’s Bank of China slashed its rate on a one-year loan to 2.75% from 2.85% and pumped another 400 billion yuan ($60 billion) into loan markets after growth in industrial production and retail sales weakened in July and home sales fell by double digits.

The central bank appears to have decided it now has a more pressing problem, Julian Evans-Pritchard of Capital Economics said in a report.

The slowdown adds to political headwinds for Xi, China’s most powerful leader since at least the 1980s. He is still expected to do well, but some analysts say he may be forced to compromise by sharing more of his sweeping powers with other party leaders.

Despite the downward pressure on growth, party leaders affirmed their commitment to the tough zero COVID strategy in a July 29 statement. He dropped previous references to growth targets after the economy grew just 2.5% from a year earlier in the first half of 2022.

Manufacturing output growth in July slowed to 3.8% a year ago, down 0.1 percentage point from the previous month, according to the National Bureau of Statistics. Growth in consumer spending fell to 2.7%, down 0.4 percentage points from June.

Sales of homes and other commercial real estate fell 28.8% from a year earlier.

Beijing is forcing developers to reduce debt levels, which caused economic growth to plummet in mid-2021, disrupting the recovery from the coronavirus pandemic. The crackdown has bankrupted smaller developers and stoked fears of a default by the largest group, Evergrande, which owes banks and bondholders $310 billion.

The downward trend in real estate has “a big impact on economic growth”, said Fu, the government spokesman.

The rate cuts and extra money for loans are small compared to China’s $17 trillion-a-year economy, the world’s second-largest. Instead, these changes are widely seen as a signal to the public banking sector to lend more and lower fees for commercial borrowers.

The ruling party is struggling to revive activity after Shanghai, the country’s commercial capital, and other industrial hubs were shuttered for weeks from late March to fight virus outbreaks.

Officials at the world’s busiest port in Shanghai say shipping has returned to normal, but economists say it could be months before the flow of smartphones, home appliances, consumer electronics and other goods via complex supply lines will not fully recover.

A survey of manufacturers released earlier showed activity in July contracted. Indicators for new orders, exports and employment declined.

Retail sales fell 0.7% from a year earlier in the first half after plunging 11% in April following the temporary shutdown of Shanghai and other cities.

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