Just ahead of the release of a batch of July data, China’s central bank unexpectedly cut a set of key interest rates, and followed it up with other rate cuts hours later, underscoring the loss. rapid post-Covid economic rebound that has shaken global finance. markets.
Tuesday’s data released by the National Bureau of Statistics (NBS), which comes on top of a string of weak indicators from last week, showed retail sales, industrial production and investment all rising to a slower pace than expected – indicating the drivers of business and consumption in the world’s second largest economy were severely underpowered.
Additionally, China suspended the publication of data on youth unemployment, which hit a record high of 21.3% in June.
“All major activity indicators were below consensus expectations in July, with most either flat or barely up month-on-month,” said Julian Evans-Pritchard, an 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 that the economy could slip into a recession unless political support is quickly built up.”
Nomura analysts were also pessimistic about China’s economic outlook.
“We believe the Chinese economy is facing an impending downward spiral with the worst yet to come, and this morning’s rate cut will be of limited help,” they said.
Most economists see downside risk to Chinese growth, but they don’t expect a recession.
Industrial production rose 3.7% from a year earlier, slowing from the 4.4% pace seen in June, according to BNS data, and was below expectations for a 4-year increase. 4% in a Reuters poll of analysts.
Retail sales, a consumption indicator, rose 2.5% from a 3.1% increase in June and missed analysts’ forecasts of 4.5% growth despite the summer holiday season. trips.
This is the slowest growth since December 2022, showing how much of a challenge authorities face as they try to make consumption the main driver of future economic growth.
More stimulation
Asian equities stagnated at 1-month lows, the yuan hit a 9-month nadir while the dollar remained broadly firm after weak Chinese data and the latest policy easing measures.
After the initial rate cuts, China’s major state-owned banks sold US dollars and bought yuan in a bid to stem the currency’s rapid decline, three people with direct knowledge of the matter said. Sovereign bond yields fell to three-year lows and benchmark equity indices fell.
Record credit growth and mounting deflation risks in July necessitated more monetary easing to halt the slowdown, market watchers said, while default risks from some property developers and missed payments by a private wealth manager also eroded market confidence.
Nie Wen, an economist at Hwabao Trust, expects special bonds to be introduced urgently and said the likelihood of a cut in the reserve requirement ratio (RRR) in the near term is relatively high.
Last month, policymakers released a package of stimulus measures, from boosting consumption of automobiles and home appliances to easing some ownership restrictions to pledging support to the sector. private, while the post-Covid rebound has quickly run out of steam since the second quarter.
The restaurant sector, which benefited from the reopening of Covid, saw slower revenue growth in July compared to June. Private sector investment fell 0.5% in the first seven months, extending the 0.2% decline in the first half of 2023.
Structural pain
The continued downturn in the real estate sector, mounting local government debt pressure, high youth unemployment and slowing foreign demand continue to be major obstacles to promoting a sustainable economic recovery.
China is going through a painful transition to an economy that is less debt-fuelled, less property-centric and more consumer-driven, said Robert Carnell, head of research for Asia-Pacific at ING.
“We will continue to see weak macro data for the foreseeable future. This is a necessary part of the adjustment and is far preferable to resurrecting the debt-fueled housing model that propelled growth before. lowering our expectations for China’s growth.”
Other data released on Tuesday showed investment in fixed assets rose 3.4% in the first seven months of 2023 from the same period a year earlier, against an expected 3.8% rise. It increased by 3.8% during the January-June period.
Investment in the real estate sector fell 8.5% year on year in January-July, after contracting 7.9% in January-June, extending its fall for the 17th consecutive month.
The national survey-based unemployment rate rose slightly to 5.3% from 5.2% in June. Among OECD members, the average unemployment rate was 4.8%, with a youth unemployment rate of around 10%.
China has set its 2023 growth target at around 5%, but Nomura analysts warn the country could again miss the target as it did last year.
“We also see greater downside risk to our third and fourth quarter growth forecast of 4.9% year-on-year, and there is a growing possibility that annual GDP growth this year will miss the mark. 5.0%.”
