In January we speculated that the Chinese were going to follow a different path on interest rates to other major economies over the remainder of the year. Sure enough, China’s central bank hasn’t followed the crowd as other countries raised borrowing rates at the fastest pace in decades (and continue to do so).
All the same, the divergence took on a more dramatic effect this week when the People’s Bank of China (PBoC) actually cut 10 basis points off a key lending rate for one-year loans.
The move was almost completely unanticipated. In its quarterly report last week the PBoC had highlighted how it was focusing on inflationary pressures and the state media dutifully took note, explaining that the possibility of cutting policy interest rates had declined. Hence the surprise at Monday’s news, as well as the suggestion that the economic data for July must have been worse than policymakers had expected.
The figures showed a “broad-based slowdown”, says Liu Jing, chief economist for Greater China at HSBC, with activity coming in below consensus forecasts in every area of measurement. Clusters of Covid outbreaks continue to weigh on the economy and a nasty deterioration in the real estate sector has also been damaging, with a major drop-off in housing sales (down just over 27% in volume terms so far this year, HSBC’s Liu reports).
Also getting mention is that retail sales rose at half the pace the market was expecting and that youth unemployment (joblessness among 16-24 year olds) reached 19.9%, a record high.
With little sign of a recovery for the property sector, as well as few indications that Beijing is changing its mind on the fundamentals of containing Covid, the question is whether the economy will slow further. Sections of the state media seem to think so and signalled this week that more action could be needed. The Securities Times reckoned that Monday’s rate cut could be the first of a series, while the Financial News, a newspaper linked to the central bank, reported calls from commentators for a new round of policies to boost growth.
Most forecasters are anticipating more monetary loosening if the news on the economy stays bleak, including reductions in reserve requirement ratios (the cash that banks must hold on account).
Another question is whether the monetary response is going to be enough to stabilise the situation, however. Although some companies will benefit from lower financing costs, they may not be convinced to take advantage of cheaper loans to grow their businesses. Consumer confidence is shaky too, if last month’s retail sales are an indicator. Spending is subdued, apart from in sectors where state subsidies have been available, like electric vehicles.
So policymakers might have to rely on other techniques to get the economy firing again, including older favourites like spending on infrastructure projects. Investment had already accelerated in July, much of it funded by local government bonds, sales of which reached their full-year quota by the end of June. But even more investment will be prioritised, aided by Rmb300 billion ($44 billion) of infrastructural funding from China’s policy banks. Expect another round of bond sales by local governments as well, HSBC’s Liu adds. That was also the implication in the People’s Daily coverage of Li Keqiang’s meeting with senior officials from six key provinces on Tuesday, when he called for Rmb1.5 trillion more in bond issuance on the basis that “the balance of local special bonds has not reached the debt limit”.
“Only by development shall we solve all problems,” the Chinese premier told attendees at the meeting.
Critics claim that a lot of this new funding won’t flow in the intended direction, however. Bond issuance by local governments in May and June was already the largest ever, notes Matthew C Klein in the Financial Times this week. But much of the proceeds were needed to plug shortfalls in local government finances. China’s provincial and municipal authorities rely on revenues from land sales to cover about a third of their spending. But a lot of that has dried up because of the crisis in the property sector. Revenues from land sales plunged 31% in the first half of this year compared to a year earlier, according to data from the Ministry of Finance.
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