China’s PBOC cuts interest rates as lockdowns and housing crisis slow economy

The People’s Bank of China cut the main rate at which it provides short-term liquidity to banks from 2.1% to 2%. The central bank also cut the rate on its one-year lending facility from 2.85% to 2.75% to “maintain reasonable and sufficient liquidity in the banking system”, it said in a statement. .

It was the first time since January that these rates had been lowered.

This decision took investors by surprise. The central bank had previously been reluctant to cut rates amid concerns over the risk of rising debt, consumer inflation and pressure on the yuan, despite the economy slowing in the quarter. April June.

“The PBOC appears to have decided it now has a more pressing problem: the latest data shows lackluster economic momentum in July and slowing credit growth, which has been less susceptible to policy easing than in previous downturns. economics,” Julian Evans-Pritchard, senior China economist at Capital Economics, said in a research note on Monday.

The market interpreted China’s rate cuts as “bearish”, ING economists wrote in a note the same day. Chinese stock markets fell on Monday, with Hong Kong Hang Seng Index (HSI) down 0.7%, and the Shanghai composite (SHCOMP) slightly lower. The yuan, meanwhile, weakened against the US dollar.

Economic data released Monday for July was much worse than expected.

Retail sales rose 2.7% in July from a year ago, slowing from June’s 3.1% growth, the National Bureau of Statistics reported. This number largely missed the 5% rise predicted by economists in a Reuters poll. Industrial production rose 3.8% in July from a year earlier, down from 3.9% growth in June. It also missed the market’s expectation of a 4.6% rise.

Moreover, the real estate crisis intensified further. Property investment by developers contracted 6.4% in the first seven months of this year, accelerating from the 5.4% decline in the first half, according to SNB data. Meanwhile, new home prices in 70 major cities fell for an 11th consecutive month in July.

“Data from July suggests the post-lockdown recovery has run out of steam as the one-off stimulus from reopening faded and mortgage boycotts sparked further deterioration in the real estate sector,” Evans-Pritchard said of Capital Economics.

Beijing’s hardline stance to eradicate the virus led to months of lockdowns in dozens of cities across the country, including Shanghai, the country’s financial and maritime hub, earlier this year. Business has been interrupted, factories have been closed and millions of people have been confined to their homes, leading to a serious disruption of economic activity.
Authorities began reopening the economy in early June, lifting restrictions in some key cities. Manufacturing and service industries had shown signs of improvement following these moves.
But several cities quickly reimposed Covid restrictions later in June as authorities struggled to contain the spread of the BA.5 subvariant of the coronavirus. According to a most recent Nomura survey, 41 cities had lockdown measures in place as of July 18, up from 31 cities the previous week.
The difficulties of the real estate sector, which represents up to 30% of Chinese GDP, exert significant pressure on the economy.

Angry homebuyers across the country have threatened to stop paying their mortgages on unfinished homes, shaking markets and prompting developers and authorities to take action to defuse the crisis.

China scrambles to defuse alarm over mortgage boycotts and bank runs

The housing market was already suffering from a prolonged decline in prices and a liquidity crisis that engulfed some of the country’s biggest developers.

Goldman Sachs (GS) said on Monday that the mortgage boycott has made people even more reluctant to buy new homes, which will likely lead to a further drop in sales.

Evans-Pritchard said it was unclear whether Monday’s rate cuts would be enough to reignite the rebound in credit growth.

“The current weakness in loan demand is partly structural, reflecting a loss of confidence in the housing market and uncertainty caused by recurring disruptions to China’s zero Covid strategy,” he said.

“These are brakes that cannot easily be solved by monetary policy,” he added.

China issues highest heat alert for nearly 70 cities in second heatwave this month

Fu Linghui, spokesperson for the BES, also voiced concern on Monday over extreme heat and rainfall which is hitting food production and causing inflation in the country.

A heatwave has swept across China since June, pushing temperatures above 40 degrees Celsius in dozens of cities and affecting more than 900 million people. Meanwhile, heavy torrential rains also caused severe flooding and landslides in some provinces.

“Affected by the continuous high temperature in many places, the price of fresh vegetables rose 12.9% year-on-year, which was significantly higher than the same period in previous years,” Fu said said at a Monday press conference in Beijing.

He pointed out that the extreme heat has caused droughts in some agricultural areas in the south. In the north, rains and floods have also led to poor harvests.

“August and September are the key periods for the formation of autumn cereal production. [We must] pay particular attention to the impact of natural disasters, insects and diseases on our country’s food production,” he added.

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