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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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Need to know: the economy

The British Opposition labour party unveiled proposals to deal with rising energy prices, including a bill freeze, paid for by extending the windfall tax on oil and gas producers in the North Sea. The two contenders to become the Tory’s new prime minister are under pressure to follow suit.

Latest for UK and Europe

Liz Trussthe frontrunner in the Conservative Prime Minister’s vote said she would turn Downing Street into the UK’s “economic nerve center” so that it would have a greater say in matters that would normally fall under the prerogative of the Treasury and with more powers to its agenda of tax cuts and deregulation.

FT investigation showed the UK bill for debts and benefits would rise by more than £50 billion next year due to rising inflation and interest rates. James Kirkup of the Social Market Foundation think tank says the UK must make tough decisions about tax and public services.

Column chart of additional loans compared to the March OBR forecast (£bn) showing high inflation and interest rates increasing the cost of debt interest and social benefits

Worldwide last

China stepped up the pressure Taiwan after the visit of a US congressional delegation with a new series of military exercises to isolate the island.

About 100 million Americans in a quarter of the US land area are at risk from a “extreme heat beltby 2053 as temperatures rise, according to a new report. The current solar belt, stretching from Florida to Southern California, is one of the fastest-growing regions in the country

Rising consumer spending after the lifting of pandemic restrictions helped the Japanese economy annualized growth of 2.2 percent in the second quarter. Headwinds remain from another resurgence in Covid cases, rising import costs and delays at key trading partners.

Foreign Affairs Chief Commentator Gideon Rachman looks back on his trip to South Africa and a growing sense of disappointment with Cyril Ramaphosa’s presidency.

Sri Lankan Bonds were downgraded to default status by S&P Global after the country missed payments as the political and economic crisis continued. The lack of foreign currency to pay for imports has led to shortages of fuel, food and medicine amid double-digit inflation.

We apologize for a spelling mistake in the last issue of DT. Colombia is clearly spelled that way, rather than Columbia.

Need to know: business

Rising interest rates and rising construction costs threaten recovery in European office market. In the United Kingdom, the switch to working from home has led to a large proportion of the restaurants in the city centerespecially in London’s financial district.

Many of the 5.5 million British small companies, which employs three-fifths of the country’s workforce, could collapse without government intervention to help with rising energy costs on top of rising wage and raw material costs, supply chain problems and the fallout from Brexit. Speaking of which, a new report highlights the damage of leaving the EU on the country’s labor market.

Bar chart of % increase versus last year's second quarter, showing SMB costs nearly doubled in the three months to June 2022

Selling Britain’s largest semiconductor producer to a China-controlled company has intensified the debate about how to protect the domestic chip industry, as our Big Read explains. Government intervention is also a hot topic in American politics, where conservative interest in rebuilding the country’s industrial base may finally prevail over free-market fundamentalism.

Gaming companies have been hit as players return to “real” pursuits and cut back on expenses. Console makers, video game publishers and gaming chip makers have all reported a drop in demand following the surge in demand during the pandemic.

The long list for the FT Business Book of the Year Award is off. The 15 titles, chosen by FT journalists from nearly 600 entries, highlight some of the biggest challenges facing the business world, from supply chain disruption to changing labor markets and runaway inflation.

Energy update

A German energy official told the FT the country needed to cut gas consumption by a fifth to avoid shortages this winter. He also warned that the longer-term cost of ending Germany’s dependence on Russia would be a “very high gas price” with major business implications.

state-controlled Saudi Aramco became the last oil company to break quarterly earnings records after the windfalls caused by the war in Ukraine. Net profit rose to $48.4 billion, a 90 percent year-over-year increase and the group’s highest profit since its listing in 2019.

American producers still refuse to increase output even when they make huge profits. Oil prices are also the main topic in today’s News Briefing podcast.

Coal producers also enjoy an extraordinary bloom. Thungela, South Africa’s largest export of thermal coal, reported profits increased by more than 4,000 percent in the first half of the year.

Mark CarneyFormer head of the Bank of England and co-chair of the Glasgow Financial Alliance for Net Zero, said governments should seize the opportunity to switch to renewable energy, backed by the firepower of the global financial sector.

Covid cases and vaccinations

Total number of worldwide cases: 582.2mn

Total Doses Administered: 12.4 billion euros

Get the latest global photo with our vaccine tracker

What good news…

The start of the British football season has highlighted the important community work of many clubs and fan-led initiatives. A good example comes from Partick thistle supporters in Glasgow who have successfully raised donations, funded by the club, to provide free subscriptions for local causes and organizations.

Partick Thistle supporters
Partick Thistle fans have raised donations to provide free season tickets for local causes © Tommy Taylor/Partick Thistle Football Club

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