China’s central bank yesterday slashed key interest rates in a bid to kick-start the country’s stuttering economic recovery, as data showed factory output and retail sales for last month came in weaker than analysts’ expectations.
The People’s Bank of China cut its policy rates, bringing its seven-day reverse repurchase rate — a key rate at which the central bank provides short-term liquidity to banks — to a new low.
It also cut its one-year medium-term lending facility to 2.75 percent from 2.85 percent and injected an extra 400 billion yuan (US$59.15 billion) in lending markets, surprising forecasters, although some analysts believe this might not be enough to revive credit growth.
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The world’s second-biggest economy saw a bounce in business activity as some COVID-19 restrictions eased in June, but the boost is fading and Beijing remains welded to a “zero COVID-19” policy of snap lockdowns and long quarantines, which has battered sentiment.
Last month, China’s industrial production rose 3.8 percent year-on-year, down from a 3.9 percent rise in June, the Chinese National Bureau of Statistics said.
Retail sales grew at a slower-than-expected 2.7 percent from a year earlier, down from 3.1 percent in June, while the urban unemployment rate fell to 5.4 percent, the bureau said.
“The risk of stagflation in the world economy is rising, and the foundation for domestic economic recovery is not yet solid,” the bureau said in a statement.
“We think the weakness in retail sales was due to renewed virus disruptions and the blow to consumer sentiment from the problems in the property market,” Capital Economics Ltd senior China economist Julian Evans-Pritchard said in a note yesterday.
The central bank “seems to have decided it now has a more pressing problem,” Evans-Pritchard said.
The virus remains a risk, with “zero COVID-19” meaning that “targeted lockdowns will remain commonplace, depressing consumer activity and spending,” he said, while slow progress in expanding vaccination among older Chinese means this policy would not be abandoned soon.
“July’s economic data is very alarming,” Australia & New Zealand Banking Group Ltd Greater China economist Raymond Yeung (楊宇霆) told Bloomberg TV.
China’s property sector has been teetering, with frustrated home buyers across dozens of cities taking part in mortgage boycotts, as cash-strapped developers struggle to complete projects.
The country’s economic growth was just 0.4 percent on-year in the second quarter — its slowest rate since the initial COVID-19 outbreak.
Credit growth in China edged down last month, with analysts at Nomura Holdings Inc saying in a report that it did not bode well for the second half of the year.
“The combination of zero COVID strategy and the deteriorating property sector continues to drag down the economy, even as export growth remains elevated and the automobile sector gets a boost from the purchase tax cut,” Nomura analysts said.
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