China’s central bank cut its key policy rate for the first time in 10 months after new data reinforced concerns about a stagnant post-Covid recovery in the world’s second-largest economy.
The People’s Bank of China cut its medium-term credit facility, a one-year interest rate that affects banks’ borrowing costs, from 2.75 percent to 2.65 percent amid widespread expectations that Beijing would be forced to take further measures to support the economy .
The rate cut came after the central bank this week unexpectedly cut its seven-day reverse repo rate, a key gauge of short-term banking sector liquidity, and unveiled tax breaks for companies.
The move, which was accompanied by a disappointing data report for May, signaled official dissatisfaction with the state of China’s economy, which was widely expected to recover after authorities lifted strict coronavirus controls at the beginning of the year.
But growth has remained weak, hampered by a slowdown in the real estate sector, weaker export demand and a lack of confidence among businesses and consumers.
“We have not seen a return to pre-pandemic levels of confidence,” said Julian Evans-Pritchard, China economist at Capital Economics, who described the recovery as “disappointing.”
Economists expect Chinese policymakers to unleash more support in the coming months, ranging from infrastructure financing to aid to local governments, which had borne much of the cost of China’s three-year zero-Covid regime and relied heavily on real estate development for their revenues.
Chinese equities were generally higher after the interest rate cut, but gains were limited by last month’s underperformance in retail sales and investment. The Hang Seng China Enterprises index of Hong Kong-listed mainland Chinese companies rose 1.4 percent, while the CSI 300 index of Shanghai and Shenzhen-listed stocks rose 0.6 percent.
Data released by the National Bureau of Statistics on Thursday reinforced pessimism about China’s growth prospects, putting pressure on the government’s official target of 5 percent full-year growth, which is already the lowest in China. it’s decades.
Retail sales and industrial production fell short of expectations, rising 12.7 percent and 3.5 percent year on year, respectively, in May, up from 18.4 percent and 5.6 percent in April. The numbers were supported by a low base effect comparison with sweeping lockdowns in China’s largest cities last year.
“The underlying narrative on the economy is extremely disappointing at this point,” Robert Carnell, Head of Research Asia-Pacific for ING, said in a note to clients. He predicted further stimulus measures to come, adding that they were likely fiscal rather than monetary to encourage spending.
Youth unemployment reached 20.8 percent, the highest level since records began in 2018, a further sign of Beijing’s struggle to provide enough jobs for young people. Total unemployment remained stable at 5.2 percent.
The data release also confirmed that China’s huge real estate sector is still in trouble more than 18 months after it was plunged into crisis by the default of Evergrande, the world’s most indebted developer.
The start of new construction in the first five months of 2023 was 23 percent lower on an annual basis in terms of floor space. Prices of new homes increased slightly compared to the previous month, but remained lower than in 2022.
China’s statistics agency said growth would be “significantly faster” in the second quarter than in the first, when the economy grew 4.5 percent. But it warned that “the international environment was still complicated and serious” and “the foundations for the economic recovery are not yet solid”.
The momentum of the recovery is expected to slow further in June and July as the beneficial base effects of last year’s Shanghai lockdown fade, Goldman Sachs wrote in a research note.
“We expect more (targeted) easing measures in the coming months, especially on tax and housing, to counter the continued weakness in the economy,” Goldman wrote. But the bank warned that the size of any stimulus would likely be smaller than in previous easing cycles.
“The bottom line is that business is still weak (in China) and we need to temper expectations for the second half of the year,” said Steve Cochrane, Asia Pacific chief economist at Moody’s Investor Services.
“Aggressive but very focused policy action is needed to get the economy going,” he added, pointing to a policy intervention that is “either very strongly focused on consumer spending. . . or do something about youth unemployment”.
In foreign exchange markets, the renminbi weakened as much as 0.3 percent against the dollar to Rmb7.1807 after the PBoC announced the medium-term interest rate cut. month low.
Additional reporting by Andy Lin in Hong Kong