China Cuts Interest Rates to Support Fragile Recovery

Introduction

China unexpectedly cut key interest rates for the second time in three months on Tuesday. However, industrial production and retail sales in July were lower than expected. This indicates the need for policymakers to take more support measures to strengthen the fragile recovery.

Interest Rate Cut

The People’s Bank of China announced a 15 basis point cut in the interest rate on a 401 billion yuan ($55.25 billion) loan under a one-year medium-term credit line. The rate was reduced from 2.65 percent to 2.50 percent.

Market Expectations

A Reuters survey showed that 20 out of 26 market watchers expected the central bank to keep interest rates unchanged. Only 6 respondents anticipated a modest cut.

Additional Measures

The central bank also injected 204 billion yuan through a 7-day reverse repo, reducing borrowing costs by 10 basis points to 1.80% from 1.90%.

Weakening Data

Since the interest rate cut in June, data has been showing increasing weakness in the Chinese economy. For example, industrial production growth slowed down to 3.7% in July compared to 4.4% in June. Retail sales also experienced slower growth.

In addition, manufacturing data released by the National Bureau of Statistics fell short of expectations in a Reuters poll of analysts.

Retail sales in July rose by only 2.5%, lower than the 3.1% increase in June. Analysts had predicted growth of 4.5%.

Fixed investment in the first seven months of 2023 increased by 3.4%, lower than the expected growth of 3.8%.

Real Estate Investment Decline

Real estate investment in China dropped by 8.5% in the first seven months compared to the previous year. This is attributed to weak demand and a worsening debt crisis.

Official data revealed a 6.5% decline in real estate sales by area from January to July compared to the previous year. The volume of new construction also fell by 24.5% year on year in July.

The real estate debt crisis in China has worsened due to a lack of strong political support. This further exacerbates the challenges faced by the economy.

Conclusion

Last week’s disappointing data, including trade and consumer price data, as well as record low credit growth, emphasizes the need for additional government support measures.