China’s economy weakens in July – central bank cuts interest rates

economy in China

A delivery man transports home appliances from a delivery center.

(Photo: dpa)

Beijing As a sign of a weakening economy, important economic data in China again fell short of expectations in July. The Beijing Bureau of Statistics reported on Monday that retail sales growth slowed to 2.7 percent year-on-year in July.

Chinese industrial production also grew at 3.8 percent in July, slower than analysts had expected. Just like fixed investments, which increased by 5.7 percent in the period from January to July. There is a risk that many cities, including key manufacturing hubs and popular tourist spots, will re-impose lockdowns in July to contain omicron outbreaks.

China’s central bank reacted on Monday, unexpectedly cutting key interest rates to boost economic growth. It capped the reference rate for one-year loans to some financial institutions (MLF) to 2.75 from the previous 2.85 percent. This is intended to lower the cost of credit for companies and thus stimulate the economy.

The central bank also lowered the key rate for reverse repo transactions on Monday to 2.0 percent from the previous 2.10 percent. This serves to control the liquidity in the banking system. It was the second 10 basis point cut in those rates this year. In spring, gross domestic product (GDP) increased by only 0.4 percent due to tough corona lockdowns.

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Expert: China’s monetary policy is losing traction

Analysts expect that the government will not be able to meet the growth target of 5.5 percent for this year. This also has to do with a flagging real estate sector and restrained consumer spending.

Commenting on the new economic data, RBC strategist Alvin Tan said: “These are further signs that the growth momentum is fading rapidly after the Shanghai lockdown. Monetary policy is losing traction, apart possibly from the exchange rate, with exports being the only bright spot in the economy.”

The director of the China Chief Economist Forum, Wang Jun, sees only limited opportunities for business leaders in the People’s Republic to support the economy. Even if lending is being made easier, companies and consumers are currently cautious about taking on further liabilities: “Some are repaying their debts ahead of schedule. That could herald a recession.”

In addition, according to experts, Chinese monetary policy has hardly any leeway: The US Federal Reserve and the European Central Bank have started a new cycle of interest rate hikes to combat inflation. China is therefore concerned that capital will flow from Beijing to the USA and that the Chinese currency, the yuan, will be weakened. This came under pressure against the US dollar on Monday.

Meanwhile, the economy is suffering from the fact that Beijing is not moving away from its “zero corona policy”. The aim of this is to nip any outbreak in the bud. Numerous megacities had imposed strict measures, especially in spring, to prevent the spread of the highly contagious omicron variant. Problems in the real estate market are also weighing on growth in China.

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