Daily Management Review

China Lowers Key Rates As July's Dismal Set Of Data Clouds The Outlook For The Economy


China Lowers Key Rates As July's Dismal Set Of Data Clouds The Outlook For The Economy
A wide range of Chinese data released on Tuesday showed that there was increased pressure on the economy from several directions. As a result, Beijing slashed key policy rates to assist activity, but economists believe that additional support is still needed to revive growth.
China's central bank abruptly reduced key policy rates for the second time in three months less than an hour before the release of a batch of July statistics, highlighting the quick decline of the post-COVID economic resurgence that has shook international financial markets.
Retail sales, industrial output, and investment all increased at a slower rate than anticipated in the latest round of data from the National Bureau of Statistics (NBS), which comes on top of a number of weak indicators from last week. This suggests that the engines of business and consumption in the second-largest economy in the world were significantly underpowered.
"All the main activity indicators undershot consensus expectations in July, with most either stagnant or barely expanding in month on month terms," said Julian Evans-Pritchard, economist at Capital Economics.
"And with financial troubles at developers such as Country Garden likely to weigh on the housing market in the near-term, there is a real risk of the economy slipping into a recession unless policy support is ramped up soon."
Analysts at Nomura shared the same pessimism on China's economic prospects.
"We believe the Chinese economy is faced with an imminent downward spiral with the worst yet to come, and the rate cut this morning will be of limited help," they said.
Although most economists believe that Chinese economy is at risk, they do not predict a recession.
The NBS data showed that industrial output increased 3.7% from a year earlier, which was less than the 4.4% rate reported in June and was below the 4.4% increase predicted by analysts surveyed by Reuters.
Despite the summer travel season, retail sales, a measure of consumption, increased by 2.5% rather than the 3.1% expected by analysts.
It was the smallest rise since December 2022 and demonstrates how difficult it will be for government officials to make consumption the main engine of future economic growth.
After the disappointing Chinese data and the most recent policy easing measures, Asian markets stagnated at one-month lows, the yuan hit a 9-month low, while the dollar remained largely stable.
Three sources with firsthand knowledge of the situation claimed that following the rate reduction, China's big state-owned banks were seen buying yuan and selling dollars in an effort to slow the sharp depreciation of the currency. Benchmark stock indices were down, sovereign bond yields hit three-year lows.
More monetary easing measures were required to stop the downturn in July due to record-low credit growth, rising deflation concerns, default risks at some house developers, and missing payments by a private wealth manager, according to market observers.
Nie Wen, an economist at Hwabao Trust, anticipates the urgent introduction of special bonds and stated that there is a good chance that the reserve requirement ratio (RRR) will be reduced in the near future.
As a post-COVID upswing quickly fizzled out since the second quarter, policymakers last month announced a slew of stimulus measures, including raising demand for cars and household goods, removing some property restrictions, and guaranteeing support for the private sector.
The catering industry, which benefited from COVID's reopening, experienced slower revenue growth in July compared to June. Private sector investment decreased by 0.5% in the first seven months of 2023, continuing a 0.2% loss in the first half of the year.
The continuing drag in the real estate market, increasing local government debt pressure, the high young unemployment rate, and slowing international demand continue to be significant roadblocks to promoting a long-term economic recovery.
According to Robert Carnell, Asia-Pacific head of research at ING, China is going through a difficult transition to a less debt-fueled, less property-centric, and more consumer-driven economy.
"We will continue to see weak macro data for the foreseeable future. It is a necessary part of the adjustment and is far preferable to resurrecting the debt-fuelled property model that propelled growth previously. But we do need to lower our expectations for China's growth."
In contrast to estimates for a 3.8% increase, other statistics released on Tuesday showed fixed asset investment increased 3.4% in the first seven months of 2023 compared to the same period a year earlier. It increased 3.8% between January and June.
After declining 7.9% in January-June, investment in the real estate market fell 8.5% year over year in January-July, continuing its downward trend for a record-breaking 17 months.
The overall survey-based unemployment rate increased marginally from 5.2% in June to 5.3%.
After the young unemployment rate reached a record high of 21.3% in June, the NBS decided to stop publishing the data starting in August.
China set a growth target for 2023 of about 5%, but Nomura analysts fear that the nation may once again miss the mark.
"We also see bigger downside risk to our 4.9% y-o-y growth forecast for both Q3 and Q4, and it is increasingly possible that annual GDP growth this year will miss the 5.0% mark."