The People’s Bank of China reduced the main rate at which it provides short-term liquidity to banks, from 2.1% to 2%. The central bank also cut the rate of its one-year lending facility from 2.85% to 2.75% in order to “maintain reasonable and sufficient liquidity in the banking system,” it said in a statement.
It was the first time since January that those rates had been cut.
The move took investors by surprise. The central bank had previously appeared reluctant to lower rates further given concerns about the risk of rising debt, consumer inflation and pressure on the yuan, despite the economy stalling in the April-June quarter.
“The PBOC seems to have decided it now has a more pressing problem: the latest data show lacklustre economic momentum in July and a slowdown in credit growth, which has been less responsive to policy easing than during previous economic downturns,” said Julian Evans-Pritchard, senior China economist at Capital Economics, in a research note on Monday.
The market has read China’s rate cuts as “bearish,” wrote ING economists in a note on the same day. Chinese stock markets dropped on Monday, with Hong Kong’s Hang Seng (HSI) Index down 0.7%, and the Shanghai Composite slightly lower. The yuan, meanwhile, weakened against the US dollar.
Economic data published Monday for July was much worse than expected.
Retail sales grew 2.7% in July from a year ago, slowing from June’s 3.1% growth, the National Bureau of Statistics reported. That number widely missed the 5% increase forecast by economists in a Reuters poll. Industrial production was up 3.8% in July from a year earlier, down from the 3.9% growth in June. It also missed the market expectation of a 4.6% rise.
In addition, the real estate slump has intensified further. Property investment by developers contracted 6.4% in the first seven months of this year, accelerating from the 5.4% decline in the first half, data from the NBS showed. Meanwhile, new home prices in 70 major cities dropped for an 11th consecutive month in July.
“The July data suggest that the post-lockdown recovery lost steam as the one-off boost from reopening fizzled out and mortgage boycotts triggered a renewed deterioration in the property sector,” said Evans-Pritchard from Capital Economics.
Beijing’s uncompromising attitude to stamping out the virus led to months of lockdowns in dozens of cities across the country, including Shanghai, the nation’s financial and shipping hub, earlier this year. Business were halted, factories were shut, and millions of residents were confined to their homes, leading to a severe disruption of economic activity.
But multiple cities soon reimposed Covid curbs later in June, as authorities struggled to contain the spread of the BA.5 subvariant of the coronavirus. According to a most recent survey by Nomura, 41 cities had implemented lockdown measures by July 18, up from 31 cities the previous week.
Trouble in the property sector, which accounts for as much as 30% of China’s GDP, is exerting significant pressure on the economy.
Angry homebuyers across the country have threatened to stop paying their mortgages on unfinished homes, jolting markets and prompting developers and authorities to take action to defuse the crisis.
The real estate market was already suffering from a prolonged price downturn and a liquidity crisis that has engulfed some of the nation’s largest developers.
Goldman Sachs (GS) said on Monday that the mortgage boycott had made people even more reluctant to buy new homes, which will likely lead to a further decline in sales.
Evans-Pritchard said it was unclear whether Monday’s rate cuts will be enough to revive the rebound in credit growth.
“The current weakness in loan demand is partly structural, reflecting a loss of confidence in the housing market and the uncertainty caused by recurrent disruptions from China’s zero Covid strategy,” he said.
“These are drags that can’t be easily solved by monetary policy,” he added.
Fu Linghui, a spokesperson for the NBS, also expressed concerns on Monday about extreme heat and rainfalls that are hitting food production and causing inflation in the country.
A heat wave has swept across China since June, pushing temperatures over 40 degrees Celsius for dozens of cities and affecting more than 900 million people. Meanwhile, heavy rainstorms have also brought severe flooding and landslides to some provinces.
“Affected by the continuous high temperature in many places, the price of fresh vegetables rose by 12.9% year-on-year, which was significantly higher than the same period in previous years,” Fu said at a Monday press conference in Beijing.
He pointed out that the extreme heat has caused droughts in some agricultural areas in the south. In the north, rainfall and flooding also resulted in some crop failures.
“August and September are the key periods for the formation of autumn grain production. [We must] pay close attention to the impact of natural disaster, insects and disease on our country’s food production,” he added.