China surprises with rate cut as July data shows ‘alarming’ slowdown

BEIJING (BLOOMBERG) - China’s central bank has unexpectedly cut its key interest rates as it ramps up support for an economy weighed by Covid-19 lockdowns and a deepening property downturn. 

The People’s Bank of China (PBOC) on Monday (Aug 15) lowered the rate on its one-year policy loans by 10 basis points to 2.75 per cent and the seven-day reverse repo rate to 2 per cent from 2.1 per cent. All 20 economists polled by Bloomberg had forecast that the rate on the one-year medium-term lending facility would be left unchanged. 

The need for additional stimulus was underscored shortly after the surprise move, when official data showed that retail, investment and industrial production numbers for July all missed economists’ estimates. 

Industrial production rose 3.8 per cent from a year ago, the National Bureau of Statistics said, lower than June’s 3.9 per cent and missing economists’ forecast of a 4.3 per cent increase.

Retail sales grew at a slower-than-expected pace of 2.7 per cent.

Fixed-asset investment gained 5.7 per cent in the first seven months of the year, worse than the 6.2 per cent projected by economists.

“July’s economic data is very alarming,” said Mr Raymond Yeung, ANZ economist for Greater China. “The Covid-19-zero policy continues to hit the service sector and dampen household consumption.”

China’s 10-year government bond yield slid five basis points to 2.675 per cent, the lowest level since May 2020. The offshore renminbi extended losses, falling 0.3 per cent to 6.7607 per United States dollar.

Stocks were volatile in the morning session. The benchmark CSI 300 Index was little changed as at 10.11am in Shanghai, after rising as much as 0.7 per cent following the PBOC’s rate cuts.

The nation’s commitment to Covid-19-zero has made it tough to sustain any hard-won economic progress, as the threat of repeated restrictions and reopening continues to loom. August saw a surge in cases on the resort island of Hainan, where the authorities have locked down holidaymakers, suspended flights and shut businesses to contain infections. 

While the PBOC’s rate cut was small, “it is more of a signalling effect” showing that the authorities are prepared to act, said Pinpoint Asset Management chief economist Zhang Zhiwei.

“In terms of the size of this action, it is quite limited. In order to turn around the market expectation and break the downward spiral, they need to do a lot more.”

The PBOC’s move follows Friday’s weaker-than-expected credit growth data for July as new loans and corporate bond issuance slowed. The figures raise the risks of a liquidity trap where monetary easing is failing to spur lending in the economy.

The rate cut widens the divergence between the PBOC’s stance and that of other major central banks, which are tightening monetary policy to curb soaring inflation. This is raising risks for the renminbi as capital outflow pressures increase. 

It also comes a surprise as the PBOC recently warned against the risk of rising inflation, even though domestic demand still remains soft, keeping overall price pressures in check for now.

The rate reduction underscores the severity of growth challenges. China’s top leaders vowed last month to achieve “the best outcome” possible for economic growth this year while sticking to a strict Covid-19-zero policy, and downplayed the official target of around 5.5 per cent growth. Economists polled by Bloomberg forecast the economy to expand only 3.8 per cent this year.