China’s economic recovery slowed even further than expected in July, as Covid restrictions and a crumbling property market compound additional woes.
Nearly all key economic indicators fell short of economists’ predictions, in data released Monday’s by China’s National Bureau of Statistics (NBS).
The weak numbers prompted China’s central bank to unexpectedly trim key interest rates as well as drain money from the financial system Monday morning.
The People’s Bank of China said it was lowering the rate on 400 billion yuan ($59 billion) of one-year medium-term lending facility loans by 10 basis points to 2.75% from 2.85%, in the hope of boosting credit demand. A poll of more than 30 experts had predicted the rate would remain unchanged.
Indeed, the most shocking of Monday’s data were retail sales. Economic consensus predicted a robust rise of at least 5%, but growth in the sector softened to 2.7% year-on-year from last month’s 3.1%.
The rate cut won’t make a difference, some said.
“If businesses were eager to expand production, but were unable to do so because the cost of capital was too high, a cut in rates would almost certainly cause an expansion in investment and production,” said Peking University finance professor Michael Pettis.
“But does anyone think that is the case? Businesses and households seem to be cutting back on their borrowing because of their concerns about economic weakness. The problem, in other words, is lack of domestic demand, not expensive capital,” he told Barron’s.
Industrial production also remained tepid, at 3.8% versus forecasts of nearly 5%. As Chinese exports remain relatively strong, this means that most of that factory output went overseas instead of being consumed at home—another sign of weak demand and a thorn in the side of policy makers’ whose long-running goal has been to shift the economy toward domestic consumptions.
“The July rebound narrative has turned out to be a total myth, as China Beige Book’s data had shown in real-time,” Shehzad Qazi, managing director of China Beige Book, told Barron’s. “Every major sector is struggling and with both credit supply and credit demand falling, prospects for a meaningful rebound in the second half of 2022 are looking cloudy.”
Home prices inched down as well from June. Of 70 major cities surveyed, the prices of new properties fell in 40 of those cities, versus 38 in June. For second hand homes in those areas, 51 cities saw drops, up from last month’s 48.
Real estate is an outsize component of China’s economy, accounting for an estimated 30% of GDP. As there are few alternate outlets for citizens to invest, property remains a prime area, so price drops hurt investor returns.
wrote Sunday that Chinese developers could expect a 30% year-on- year decline in first-half earnings, which will likely exacerbate the impact of almost $100 billion having been erased from Chinese property stocks and dollar bonds so far this year. This is on top of increasing developer defaults and residents refusing to pay mortgages on unfinished units.
The closest metric to a bright spot was urban unemployment, which ticked down to 5.4% from 5.5% the previous month. However, there was little cheer for the younger Chinese—aged 16-24—where the rate is near 20%, meaning 1 in 5 Chinese youth cannot find work.
Prospects for August don’t look good. This month, there has been a near-unprecedented series of Covid outbreaks across 10 Chinese regions, many of which are in tourist or manufacturing hubs. Despite the specter of a nationwide outbreak of the highly contagious current Covid strain, President Xi Jinping has said the country will under no circumstances waver from its strict zero-Covid policy, regardless of economic consequences.
The Chinese government and media put a positive spin on the data, with NBS spokesperson Fu Linghui saying publicly, “In the face of a more complex and severe international environment and the unfavorable situation of frequent domestic epidemics, the national economy continued to recover.”
Despite the data, mainland markets shrugged, with major indexes closing roughly flat.
Finally, Speaker Nancy Pelosi’s visit to Taiwan and the reaction this provoked in China has contributed to investors remaining on edge. After last week’s unprecedented aggressive military drills by the People’s Liberation Army, Beijing said that Sunday’s separate and unannounced visit by lower-level U.S. congressional members will likely result in a resumption of shelling, airspace incursions, and offensive naval exercises against Taiwan.
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