Chinese economy ‘in desperate situation’
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China cut a key interest rate today as new data confirmed the slowdown of the world’s second largest economy.
The People’s Bank of China unexpectedly cut the 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, and points to concerns in Beijing about shrinking consumer demand.
The country’s economy narrowly escaped contraction in the second quarter, according to new data released after the central bank’s decision, as consumer and factory activity faltered due to repeated pandemic lockdowns.
Retail sales and industrial production rose, but much less than expected, while youth unemployment hit a record 19.9 percent. Growth in the second half of the year is likely to be further hampered by Beijing’s zero-covid strategy and a slowdown in exports.
Chinese equities fell on the disappointing data, putting them on a path different from rising equity markets in other major economies such as the US and eroding investor confidence in the global outlook.
Several Chinese cities are experiencing new or extended lockdowns, and in Shanghai, authorities are testing drones to ensure residents scan their health codes on a mandatory smartphone app — dubbed “digital handcuffs” for their use in social control — when they enter a building.
Falling consumer confidence was highlighted by weakening sales of high-value goods, such as the market for second-hand luxury watches and bags. Rising geopolitical tensions are also deteriorating prospects for sectors such as semiconductor manufacturing, while demand for chips used in smartphones and consumer electronics has declined.
Chinese investors, hit by market sell-offs and widespread defaults in the country’s ravaged real estate market, are looking for alternative assets like jade, while cash-strapped consumers have started a new trend for food that is soon to expire.
While inflation is lower than in other major economies, it remains at its highest level in two years, according to data released last week.
However, lockdowns and strict quarantine regulations remain the main drivers of the new pessimism. To cite just one recent example, international schools in Hong Kong are struggling to hire teachers for the new academic year.
“China is definitely in a very desperate situation,” said Xingdong Chen, an economist at BNP Paribas. “The problem is not an effective question now. If you don’t allow people to come out to consume. . . there is no question.”
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