In a largely unexpected move, China cut a benchmark interest rate yesterday, marking the most significant rate cut since 2020. The news came not long after the release of disappointing retail sales and industrial production numbers, combined with rising fears around the weakness of China’s broader economy.
The Chinese central bank reduced the rate on its one-year medium-term lending facility loans by 15 basis points to 2.50%. The rate cut was mirrored by a dip in the yuan and bond yields.
Shaky property sector influences wider economy
Further to the less-than-stellar economic figures, the risk of contagion from a debt crisis in the property sector has sent ripples through global markets.
For instance, the revelation that property developer Country Garden Holdings teetered on the edge of default, coupled with the inability of wealth manager Zhongzhi to make certain client payments, sent the Australian dollar and iron ore prices into a tumble.
Nomura China economist Ting Lu described the potential fallout, stating, “The chain reaction triggered by slumping new home sales may lead to a rising number of developers’ defaults, a sharp contraction of government revenue, falling demand for construction materials, declining wages of employees in both the property and government sector, weaker consumption and faltering financial institutions.”
The troubles in the property sector, a significant contributor to China's economic engine, haven't gone unnoticed by global investors. Property investment dipped by 8.5% year-on-year in the January-July period, marking 17 consecutive months of decline.
Economic indicators signal caution
Hit by deflation, amongst a slew of other problems, the latest round of economic data further underscores the challenges China faces, including foreign investment plummeting to levels not seen since 1998.
Retail sales did see an uptick of 2.5% year on year in July but it lagged behind the projected 4% growth. Industrial production figures also disappointed with a growth rate of 3.7%, down from June's 4.4%. The unemployment rate also marginally increased.
Interestingly, amidst these challenges, China has expressed intentions to relax tariffs and restrictions on pivotal Australian exports. This has sparked discussions about Australia's Beijing trade dependence. With President Xi Jinping’s government exhibiting unpredictable policy shifts, China appears to be a riskier trade partner than a decade ago.
Yet, in a bid to reinvigorate foreign investment, China’s State Council has introduced 24 guidelines to improve foreign investment conditions, with an emphasis on bolstering intellectual property rights.
Despite these efforts, the consensus among economists is that rate cuts and foreign investment initiatives might not suffice to stabilise the economy. Julian Evans-Pritchard from Capital Economics voiced this sentiment, saying monetary stimulus might be insufficient to establish a growth foundation.
This sentiment was echoed by the National Australia Bank (NAB), which suggested that China might fall short of its annual growth target of approximately 5%. The NAB maintained its projection of 5.2% growth for 2023, however.
Concerns over data transparency
While China's economic data has been a guiding tool for global investors, the recent decision to withhold youth unemployment statistics has caused some unease. Gerard Burg from NAB remarked on the lukewarm loan demand, hinting that any modest rate cut by the PBoC may not significantly boost the economy.
Ting Lu from Nomura added, “The declining availability of macro data may further weaken global investors’ confidence in China and impair Beijing’s ability in assessing the real situation of the Chinese economy.”
In addition to the release of the economic data and the rate cut, China also declared it would momentarily halt the publication of youth unemployment statistics. That decision has only increased speculation that youth unemployment now exceeds the last reported figures of 20%.
However, China's National Bureau of Statistics clarified that the jobless rate for the 16-24 age bracket wouldn't be released from August onward until improved surveying methodologies were in place. This means the awaited data for July will remain undisclosed for now.
With such multi-dimensional challenges facing the world's second-largest economy, the coming months will be pivotal in assessing China's economic resilience and adaptability.