China’s Communist Party government and leadership are getting very, very worried about the health if the economy, judging by the second round of official rate cuts in just a week on Monday from the country’s central bank.
Combined with the continuing impact of Covid cases (over 2,000 cases a day being officially announced) and the continuing and deepening drought across the country’s southwest, centres on the huge Yangtze River basin, the Chinese economy has got a bad case of the staggers.
In fact the drought has reportedly forced Tesla, the US carmaker and another, state owned carmaker to suspended production at their factories in Shanghai because of component shortages triggered by the drought in Sichuan. It is the second time in five months that Tesla’s huge Shanghai factory has been forced to suspend production
They are only two of hundreds of factories and businesses forced to suspend production last week and much of this week in Sichuan and in parts of nearby provinces because of the near 70-day drought.
The quick rate cuts were not linked to the impact of the drought but the slowing pace of activity in the wider economy (to which the drought is adding).
Monday’s cuts were the 4th this year for a major set of official Chinese interest rates and were in stark contrast to official rate rises elsewhere, such as in the US, Australia, Europe, Canada, India and much of Asia.
The rate cuts are the best indicator of how, for all the vainglorious boasting of the country’s official media, the Chinese economy is in a terrible place and in desperate need of revival.
The People’s Bank of China on Monday lowered the one-year loan prime rate (LPR) by 0.05 of a percentage point to 3.65% from 3.7%, while the five-year rate was cut by 0.15 percentage points to 4.30% from 4.45%.
The one-year LPR was last reduced in January. The five-year cut was a record and equals the cut in May.
That rate influences the pricing of home mortgages and the cut in may failed to have any lasting impact and economists think it will not have much of an impact this time either because the housing sector is too damaged by the slump in demand.
“All told, the impression we get from all the PBOC’s recent announcements is that policy is being eased but not dramatically,” said Sheana Yue, China economist at Capital Economics said in a note Monday.
“We anticipate two more 10 bps cuts to the PBOC policy rates over the remainder of this year and continue to forecast a reserve requirement ratio (RRR) cut next quarter.”
Last week, the People’s Bank of China lowered the rate of one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points.
Those cuts came the same day as disappointing economic data for July showing weak growth in production, weak retail sales and sliding investment, especially in the worrisome property sector where prices, investment and lending slumped sharply in July.
That data prompted some banks, including Goldman Sachs and Nomura, to cut their full-year GDP growth forecasts for China.
Goldman Sachs lowered China’s 2022 full-year GDP growth forecast to 3.0% from 3.3% previously, far below Beijing’s target of around 5.5%. In a tacit acknowledgement of the challenge in meeting the GDP target, the government omitted a mention of it in a recent high profile policy meeting.
The deeper cut to the mortgage reference rate underlines the growing worries of Chinese by policymakers about the tanking the property sector after a string of defaults among developers and a slump in home sales with more reports of boycotts by buyers of mortgage repayments.
But the rapidly deepening drought is now piling more misery on an economy strained by slowing demand, the ravages of Covid and the stupid zero-policy stance of President Xi Jinping (who thinks it will make him President for life).
As with Covid, the drought is something the Chinese Communist Party can’t control or re-educate, despite all the stories in official media of heroic efforts to ’seed’ clouds, about the efforts of irrigation and advice teams, fire fighters pumping water across parched land and more.
Like we have seen in Europe, parts of the US and a few years ago, Australia, drought can strangle the essential rural sector while damaging manufacturing and urban livelihoods as well.
On Sunday, China’s Central Meteorological Center (CMC) continued its red alert – the highest in China’s four-tier weather warning system for extreme heat – marking the tenth consecutive day the warning has been published
More than 200 meteorological monitoring stations across the country show temperature in places including Southwest China’s Chongqing, Sichuan, East China’s Zhejiang and Northwest Shaanxi exceeded 40 C since August 1, state media reported.
Some provincial capitals, including Nanjing and Nanchang have been dry since the start of August and Sichuan, a province which relies on hydropower for approximately 80% of its electricity, initiated a top emergency response to ensure energy supply on Sunday.
Plants closed for five days until August 20 (last Friday) were told to remain shut until Thursday at the earliest.
The “tense situation” of power supplies in Sichuan province “has further intensified,” Tencent News reported Monday.
There was no public announcement, but the report included a picture of the government notice to companies.
On Monday, LIER Chemical Co. said in an announcement through the stock exchange in the southern city of Shenzhen that its facilities in the cities of Jinyang and Guang’an in Sichuan had received an order extending power rationing through Thursday.
The city government of Shanghai said Tesla Ltd. and SAIC, a major state-owned automaker suspended production due to disruption in supplies of components from Sichuan. Tesla was shut for most of April in the mishandled Covid shutdown of China’s biggest city.
Chinese media reports say companies in Sichuan are telling staff to work from home and the government is also warning them not to run air conditioners cooler than 26 degress celsius.
As of Saturday, Sichuan’s daily hydropower generation capacity has dropped 51.1% to 440 million kilowatt-hours from a previous 900 million, media reports revealed on Monday.
In Shanghai, the local government ordered landscape illumination turned off in certain tourist areas such as the Bund, on Monday and Tuesday, to save energy.
Economists are also concerned about the impact of a lasting drought on autumn harvest, which accounts for 75% of China’s total grain output, and it is only about 50 days away.
According to the latest estimate from the Ministry of Water Resources, 32.99 million arable land across China is being impacted by drought.
The mid-late August is a key period for China’s autumn grain corps to grow in the middle and lower stream of the Yangtze River and the persisting heat wave plus drought will reduce the yield of crops such as corn and soybean.
