Confirmation that for all his blustering over Taiwan, Covid, corruption and a new way of living, China’s President Xi Jinping is presiding over an economy that is sliding its way towards a debilitating slowdown, or at worst, a recession.
China’s interest rate trims yesterday by the country’s central bank is confirmation of the growing sense of panic at the highest levels at the health of the economy.
After two small trims in January, the central bank and government has ignored rising pressures to help consumers and business with more rate cuts, especially after the havoc wreaked on demand and production by Xi’s ham-fisted lockdowns in Shanghai, parts of Beijing and other cities and provinces from march through June which saw economic growth come to a halt.
A fitful recovery since then has not been convincing and as the economic activity data for July released yesterday showed, the economy is tottering on the edge.
So yesterday the People’s Bank of China cut a key interest rate in a surprise move that confirms the rising concerns about the strength of economic growth and sluggishness in credit.
Industrial production, retail sales and urban investment grew in July, but at rates far slower than forecast as the economy continues to struggle with weak demand and patches of worrying inflation.
The data confirms a picture of an economy struggling for momentum to the point where it has seen the central bank forced to cut rates at a time when major central banks offshore (with the exception of Japan) are raising rates to try and help put a lid on rising inflation.
Consumer price inflation is rising in China – the 2.7% rate in July was the highest for two years. But unlike the US, Australia, much of Europe and even the UK, rates are rising against a background of solid consumer demand and OK business investment.
Monday’s data confirmed China’s economy is nowhere as strong and has developed a distinct wobble.
In fact China’s economy has slowed sharply from April onwards as Xi’s hardline Covid zero policy (since considerably modified) brought the economy to a halt, hit exports, imports, retail sales, investment and property prices.
That’s why some analysts reckon Xi’s blustering over Taiwan and the visit by US House of Representatives speaker, Nancy Pelosi, was a smokescreen to try and divert attention from the tanking economy.
The People’s Bank of China said Monday it was cutting the rate on 400 billion yuan ($US59 billion) worth of one-year, medium-term lending facility (MLF) loans to some banks by 10 basis points to 2.75% from 2.85%.
The PBOC attributed its move to “keep banking system liquidity reasonably ample,” according to Reuters.
And with 600 billion yuan worth of MLF loans maturing, the operation resulted a net 200 billion yuan withdrawal – in other words a tightening of liquidity.
But central bank also injected 2 billion yuan through seven-day reverse repos while cutting the borrowing cost by the same margin of 10 bps to 2.0% from 2.1%, according to an online statement. The PBOC last cut both rates by 10 bps in January
The move came as fresh data showed that China’s industrial production grew 3.8% in July compared with 3.9% in June and a market consensus for 4.6% growth (a big miss).
Production fell for both manufacturing (2.7% vs 3.4% in June) and mining output growth quickened (8.1% vs 8.7%), while utilities output continued to rise (9.5% vs 3.3%) as China endured a new series of heatwaves which drove up demand for electricity and coal.
For the first seven months of the year, industrial output expanded by 3.5% from the same period of 2021 but crude steel and cement production all fell sharply in July from June.
Retail sales remained soft last month dipping to 2.7% growth from 3.1% in June and a market consensus for 5% growth, again a big miss. While sales of home appliances, jewellery and office supplies rose, falls or smaller increases were recorded throughout the rest, especially cars, oil and building products.
Retail sales for the seven months to July are down 0.2% thanks to the impact of the lockdowns from March through May.
China’s fixed-asset investment rose an annual 5.7% in July, slower than with market forecasts of 6.2% and the 6.1% growth in the first six months of the year.
New bank lending in China tumbled more than expected in July (to a 12 month low and almost half the amount lent a year earlier) while broad credit growth slowed, as fresh COVID flare-ups, worries about jobs and a deepening property crisis made companies and consumers wary of taking on more debt (hence the rate cuts on Monday to encourage more credit)
Unemployment among 16- to 24-year-olds hit a record 19.9% in July, according to data from the National Bureau of Statistics.
Average new home prices in China’s 70 major cities dropped by 0.9% from July last year after June’s 0.50% drop. It was the third straight month of decrease in new home prices, and the steepest fall since September 2015.
China posted its weakest quarterly growth in two years in the three months to June, with the economy expanding just 0.4% from year ago, as Covid lockdowns in major cities, including the financial capital of Shanghai, slammed activity, retail sales, production, exports and imports.
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And data yesterday revealed a stark difference with Japan’s second quarter performance – an economy and country China’s politicians and mouthpieces including President Xi love to disparage.
Japan’s economy grew an annualised 2.2% in the second quarter, as solid private demand helped boost to the country’s long-delayed recovery from the COVID-19 pandemic.
The relatively strong economic data released on Monday comes after gross domestic product (GDP) grew just 0.1% in the three months to March.
The growth was driven largely by a 1.1% rise in private consumption, which accounts for more than half of Japan’s GDP, as eating out, leisure and travel recovered after following the pandemic curbs ended in March.
The latest data mean Japan’s 542.12 trillion yen ($US4.07 trillion) economy is now larger than it was before the pandemic hit in early 2020.
But the weaker yen, and a resurgence in domestic Covid infections, which have topped 200,000 daily cases in recent weeks remains a shadow over the economy, although japan seems to be grappling with its case numbers compared to China where sporadic lockdowns and halts to movements pop up up weekly and sometimes daily, as new infections emerge.
Japanese inflation is running at more than 2.4% (the highest level in more than 7 years) whereas China’s rate is 2.7%, the highest for two years.
In July, the International Monetary Fund cut Japan’s growth outlook for 2022 to 1.7%, down from 2.4% in April. The IMF cut China’s 2022 forecast to 3.3% from 4.4% in April.
