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China cuts lending rate as economic data disappoint and Covid cases rise

China has cut a key lending rate in a bid to support growth as the world’s second-largest economy is plagued by repeated lockdowns and a worsening real estate downturn.

On Monday, the People’s Bank of China cut its medium-term interest rate, which it provides one-year loans to the banking system, by 10 basis points to 2.75 percent, the first cut since January. Analysts polled by Bloomberg had expected the PBoC to leave rates unchanged.

The decision highlighted growing concerns in Beijing as it seeks to combat a months-long decline in consumer demand caused by its ongoing zero-Covid policy, as well as the fallout from cash-strapped real estate developers slowing global growth.

Despite Beijing’s plans to inject hundreds of billions of dollars in stimulus to boost growth, the Chinese economy narrowly escaped contraction in the second quarter.

Official statistics released on Monday reflected worse-than-expected consumer and manufacturing activity as the pace of the country’s economic recovery drags on.

Retail sales, a key indicator of consumption, rose 2.7 percent year-on-year in July, while industrial production, a growth engine earlier in the pandemic, was up 3.8 percent. Analysts had forecast an increase of 5 percent and 4.6 percent, respectively.

Experts expect China’s economic slowdown will lead to easing monetary policy and fiscal stimulus, but some are pessimistic about the size and pace of Beijing’s response.

“China’s growth in” [the second half] will be significantly hampered by its zero-covid strategy, the downward spiral of real estate markets and a likely slowdown in export growth. Beijing’s policy support could be too little, too late and too inefficient,” said Ting Lu, Nomura’s chief economist in China.

Analysts also noted that Beijing’s central bankers were hesitant to cut interest rates amid concerns about rising debt and inflation.

“But the PBoC seems to have decided it now has a more pressing problem. The latest data shows weak economic momentum in July and a slowdown in credit growth, which has reacted less to policy easing than during previous economic downturns,” said Julian Evans-Pritchard, China senior economist at Capital Economics.

Xi Jinping’s zero-covid policy – ​​which is instituting strict lockdowns wherever virus outbreaks are discovered – is putting further strain on the outlook.

Several Chinese cities, including Haikou in the southern island of Hainan, as well as Urumqi in the western Xinjiang region, have imposed or extended lockdown restrictions in some areas, and cases rose across the country over the weekend. The lockdown in Hainan has sparked small-scale protests among tens of thousands of travelers stranded at the tourist destination.

In Shanghai, authorities are testing the use of drones to ensure residents scan their health codes when entering buildings. The health code is recorded on a mandatory smartphone app that determines whether individuals can travel based on their exposure to Covid-19.

Additional reporting by Gloria Li and Primrose Riordan in Hong Kong

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