Chinese Central Bank Cuts Rates – August 2022
China’s announcement of a rate cut comes as a surprise, as economic headwinds batter against the industrial giant amid ongoing weakness in key markets. Notably, the twin drag of its property slump and covid lockdown have constrained policy effects, with the growth outlook downgraded to a glum sub 4% for the rest of the year.
The statistics certainly ring alarm bells. Retail sales slowed to 2.7% in July, far below initial projections of 4.9%. Industrial output and investment similarly fell, while the jobless rate for 16-24 year olds climbed to a steep 19.9%. What is perhaps more troubling is a runaway confidence crisis among Chinese businesses and households, exacerbated by global demand shortfalls for Chinese products. This shock largely originates from China’s property turmoil. Mortgage boycotts have increased uncertainty, while policy makers have been conservative with large-scale bailouts out of fear of rising speculation. This slump has sent shockwaves into the industrial sector, with monthly steel production reaching the lowest since 2018. Another notable downside risk to the economy are China‘s stringent Covid Zero policies, which have mandated full lock downs during mass outbreaks. This stopping and starting has led to periods of fragmented and inconsistent growth across major regions.
All these effects have been felt globally as well. Damage to profitability for foreign companies have resulted in reduced investment, while commodity prices in iron ore and copper have plummeted. The UBS AG economists led by Wang Tao put it aptly; “The path of economic recovery in the second half will be bumpy and uncertain.”