China’s central bank, the People’s Bank of China (PBOC), unexpectedly cut key policy rates for the second time in three months on Tuesday, in a move to boost the slowing economy amid the Covid-19 pandemic and rising geopolitical tensions. The PBOC lowered the one-year loan prime rate (LPR) by 5 basis points to 3.80%, and the five-year LPR by 5 basis points to 4.65%. The LPR is a benchmark interest rate that banks charge their most creditworthy customers.
The rate cut came less than an hour before the release of a batch of July data, which showed that China’s economic recovery lost momentum last month. Industrial output, retail sales, fixed asset investment, and property investment all grew at a slower pace than expected, adding to the pressure on policymakers to provide more support measures.
The PBOC said in a statement that the rate cut was aimed at “effectively reducing the financing costs of the real economy, especially small and micro enterprises”. The central bank also said that it would maintain a prudent monetary policy and keep liquidity reasonably ample.
China’s July data disappoints analysts and markets
China’s July data revealed that the world’s second-largest economy was facing multiple headwinds, including a resurgence of Covid-19 cases, floods, supply chain disruptions, regulatory crackdowns, and weakening consumer confidence. The data also missed analysts’ forecasts and market expectations, triggering a sell-off in Chinese stocks and bonds.
According to the National Bureau of Statistics (NBS), China’s industrial output grew by 3.7% year-on-year in July, down from 4.4% in June and below the consensus estimate of 4.4%. Retail sales, a gauge of consumption, rose by 2.5% year-on-year in July, down from 3.1% in June and well below the forecast of 4.5%. It was the slowest growth since December 2022.
Fixed asset investment, which measures spending on infrastructure, property, machinery and equipment, expanded by 3.4% year-on-year in the first seven months of 2023, down from 3.8% in the first half of the year and lower than the expected 3.8%. Property investment, a key driver of growth, fell by 8.5% year-on-year in January-July, after declining by 7.9% in January-June.
The NBS attributed the slowdown to the impact of Covid-19 outbreaks, heavy rainfall and floods, high commodity prices, and environmental protection measures. The NBS also said that China’s economic recovery was still “tortuous” and “unbalanced”, and that it faced “many difficulties and challenges”.
Analysts call for more stimulus measures from Beijing
The weak July data has prompted urgent calls for more stimulus measures from Beijing to shore up the faltering economy. Analysts said that China needed to ramp up fiscal spending, ease monetary policy further, relax property curbs, and boost consumption.
Lu Ting, chief China economist at Nomura, said that China’s growth momentum had “weakened significantly” and that he expected more policy easing in the coming months. He said that China could cut the reserve requirement ratio (RRR) for banks again in September or October, after reducing it by 50 basis points in July. He also said that China could increase its fiscal deficit target from 3.2% to 3.5% of GDP this year, and accelerate bond issuance and infrastructure spending.
Zhang Zhiwei, chief economist at Pinpoint Asset Management, said that China’s economic slowdown was “more severe than expected” and that he expected more policy support from both fiscal and monetary sides. He said that China could lower its LPR further by 10 to 15 basis points in the next few months, and increase its special local government bond quota by RMB1 trillion ($154 billion) this year.
Iris Pang, chief economist for Greater China at ING Bank, said that China’s consumption recovery was “very weak” and that it needed more stimulus to boost domestic demand. She said that China could ease some property restrictions to stimulate housing demand, especially in lower-tier cities where inventories were high. She also said that China could provide more subsidies or vouchers to encourage spending on services such as tourism, catering, entertainment and education.
