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China’s economic slowdown deepened in July due to a worsening property slump and ongoing coronavirus lockdowns, with an unexpected interest rate cut unlikely to make a difference as long as these twin headwinds remain.
Retail sales, industrial production and investment slowed and missed economists’ forecasts in July. The survey’s unemployment rate for 16-24 year olds rose to 19.9%, a record high and a headache for the Communist Party as it prepares for a major congress in the coming months that is expected to give President Xi Jinping a third term that defies precedent.
“The economic data for July is very worrying,” said Raymond Yeung, Greater China economist at Australia & New Zealand Banking Group Ltd. “The authorities must provide full ownership support for the Covid policy to stop further economic decline.”
The data suggests a crisis of confidence among Chinese businesses and households, adding another threat to the global economy as global demand for everything from Apple’s iPhone to luxury goods collapses. At the same time, a worsening property slump is being felt at home and abroad as commodity prices such as iron ore and copper plummet.
Chinese bond yields and the offshore yuan fell as stock markets wobbled. A rally in stocks cooled in Asia and the dollar rose as investors digested disappointing data prints and a surprise rate cut.
China’s leadership has ruled out large-scale stimulus and vowed to continue with its strict Covid Zero policy, requiring authorities to close businesses and lock down the population when large outbreaks occur – as is the case now on the resort island of Hainan. That dampens the outlook for growth for the rest of the year, which economists are pushing further below 4%.
China’s central bank cut both one-year and seven-day lending rates by 10 basis points, a move that economists said would not have much of an impact as Covid-19 curbs made households and businesses reluctant to borrow. New loans in July rose at the slowest pace since at least 2017.
“The interest rate cut shows that the whole economy is in trouble,” said Iris Pang of ING Groep NV. A wave of household mortgage boycotts over unfinished projects has made households wary of buying homes, dampening the impact of lower mortgage rates, she added.
The economic slowdown – which began in March when authorities in dozens of cities imposed lockdowns to control Covid outbreaks – has spread to major economies such as Germany and South Korea as demand for manufactured goods in China falls.
Nomura Holdings Inc. said growth in the second half will be significantly hampered by the Covid Zero policy, the downward spiral in the property market and a likely slowdown in exports as the global economy weakens.
“Beijing’s policy support may be too little, too late and too ineffective,” the economists, led by Lu Ting, wrote in a note. “We think the markets are too bullish on growth in the second half and expect another round of growth forecast cuts in the coming weeks.”
Xi and top Communist Party leaders gave a negative assessment of economic growth but did not announce new stimulus policies at a key policy meeting in July. The leadership has personally admitted that the country’s annual growth target of around 5.5% is not achievable.
Chen Long, an economist at Beijing-based consultancy Plenum, said Chinese authorities are trying to do something they have failed to do for more than two decades: revive the economy without relying on the property boom.
“Beijing needs to ease a lot more if they are serious about stimulating a new credit cycle,” he said.
Until now, politicians have refrained from a large-scale rescue of construction contractors and repeated aggressive words against speculation in the sector. Liu Peiqian, chief China economist at NatWest Group Plc, said “more substantial easing of the property sector” and easing of Covid policies are needed to improve sentiment.
Xi and other senior officials are expected to gather at a coastal resort near Beijing for an annual retreat, making any near-term announcement of stimulus policies unlikely. Discussions are likely to be dominated by personnel changes at the upcoming Communist Party Congress.
What Bloomberg Economists Say…
“The surprise sharp decline in activity in China in July shows that the economy has lost momentum after only a brief recovery triggered by the reopening in June.”
“The most surprising development was the slowdown in investment – suggesting greater than expected resistance to the property market shocks. Coming on the back of July’s extremely weak credit, the numbers support the People’s Bank of China’s decision to cut rates – and we don’t think the central bank is done yet.”
Chang Shu, Chief Economist for Asia
See here for the full report
Beijing’s attempts to boost the economy have focused on encouraging local governments to borrow to finance infrastructure. Those efforts saw some success in July, but the scale of investment was not enough to offset the sharp decline in housing investment.
The housing slump worsened in July, with sales falling more than 28% year over year and prices falling for an 11th straight month. This weighed on China’s industrial sector, with July’s monthly steel production hitting its lowest level since 2018.
One bright spot in the data was the strong growth in car production and sales after cuts in purchase taxes. China’s exports were also strong in July, defying expectations of a slowdown.
However, there were several data points that had implications for China’s long-term growth, including high youth unemployment. Foreign companies, which are taking a bigger hit to profits than their Chinese counterparts, cut investment in new projects by more than 4 percent in the first seven months of the year compared with a year earlier.
China’s local governments have issued most of the bonds they were meant to use for infrastructure spending, prompting some economists to warn of a “policy collapse” before the end of the year unless more loans are announced. Although Beijing has hinted that additional bonds may be approved, it has not yet provided any details.
“Global demand supporting China’s exports is likely to weaken,” Zhu Haibin, chief China economist at JPMorgan Chase & Co., told Bloomberg TV. “Without additional policy stimulus, China’s growth is likely to lose momentum very quickly in the fourth quarter.”
(Updates with further details throughout.)
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