China’s central bank has cut its main policy rate for the first time in 10 months as new data reinforced concerns over a stalling post-Covid recovery in the world’s second-largest economy.
The People’s Bank of China trimmed its medium-term lending facility rate, a one-year rate that influences bank funding costs, from 2.75 per cent to 2.65 per cent, amid widespread expectations that Beijing would be forced to take further action to support the economy.
The rate cut came after the central bank this week unexpectedly lowered the seven-day reverse repo rate, an important gauge for short-term banking sector liquidity, and unveiled tax breaks for businesses.
The move, which was accompanied by a disappointing data report for May, signalled official dissatisfaction with the state of the Chinese economy, which was widely expected to bounce back after authorities abandoned strict coronavirus controls at the start of the year.
But growth has remained feeble, hamstrung by a property sector slowdown, weaker demand for exports and a lack of business and consumer confidence.
Economists anticipate Chinese policymakers will unleash more support over the coming months, ranging from infrastructure funding to assistance for local governments, which had borne many of the costs of China’s three-year zero-Covid regime and relied heavily on property development for revenue.
“Ultimately they’ll need to use every lever in the policy bag to get this economy to turn around,” said Rob Carnell, Asia-Pacific head of research for ING. He said this would range from fiscal and monetary policy moves to using a weaker renminbi to encourage exports.
Chinese equities were broadly higher following the rate cut, but gains were limited by last month’s underperformance in retail sales and investment. The Hang Seng China Enterprises index of mainland Chinese companies listed in Hong Kong rose 1.4 per cent, while the CSI 300 index of Shanghai- and Shenzhen-listed stocks gained 0.6 per cent.
Data published by the National Bureau of Statistics on Thursday reinforced pessimism over China’s growth prospects, putting pressure on the government’s official full-year target of a 5 per cent expansion, which is already the lowest in decades.
Retail sales and industrial production missed expectations, adding 12.7 per cent and 3.5 per cent respectively year on year in May, down from 18.4 per cent and 5.6 per cent in April. The figures were buoyed by a low base effect comparison with sweeping lockdowns in China’s biggest cities last year.
“We haven’t seen a return to the level of confidence prior to the pandemic,” said Julian Evans-Pritchard, China economist at Capital Economics, describing the recovery as “underwhelming”.
Youth unemployment hit 20.8 per cent, the highest level since records began in 2018, in a further sign of Beijing’s struggle to provide enough jobs for young people. Overall unemployment was static at 5.2 per cent.
The data release also confirmed that China’s vast property sector was still ailing, more than 18 months after it was plunged into crisis by the default of Evergrande, the world’s most indebted developer.
New construction starts in the first five months of 2023 were down 23 per cent year on year by floor area. New home prices rose slightly on the previous month but remained down compared with 2022.
China’s statistics bureau said growth in the second quarter would be “significantly faster” than in the first, when the economy added 4.5 per cent. But it warned that “the international environment was still complicated and severe” and “the foundation for the economic recovery is not yet solid”.
The recovery’s momentum is expected to slow further in June and July as favourable base effects fade from last year’s lockdown in Shanghai, Goldman Sachs wrote in a research note.
“We expect more (targeted) easing measures in coming months, especially on fiscal and housing, to counteract the persistent weakness in the economy,” Goldman wrote. But the bank cautioned that the magnitude of any stimulus would probably be smaller than in previous easing cycles.
“The takeaway is that things are still soft [in China], and we’ll need to temper expectations for the second half of the year,” said Steve Cochrane, chief Asia-Pacific economist at Moody’s Investor Services.
“There’s got to be some aggressive but very targeted policy measures to get the economy going,” he added, pointing to a policy intervention that “either focuses very sharply on consumer spending . . . or doing something with youth unemployment”.
In currency markets, the renminbi weakened as much as 0.3 per cent against the dollar to Rmb7.1807 after the PBoC announced the medium-term lending rate cut, taking the currency about 4 per cent lower against the greenback year to date and to a six-month low.
Additional reporting by Andy Lin in Hong Kong
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