China has recently unveiled a series of measures aimed at bolstering its economy before an important Politburo meeting that will assess the performance of the world’s second-largest economy in the first half of the year.
In a surprise move, the People’s Bank of China cut interest rates on one-year medium-term lending facility (MLF) loans by 10 basis points to stimulate the struggling economy. This marks the second rate cut in three months.
The rate cut comes in the wake of disappointing July data, which revealed that industrial output only rose by 3.7% compared to the previous year, falling short of analysts’ expectations. Retail sales also experienced slower growth, increasing by just 2.5%.
To further stimulate the economy, the PBOC also cut short-term rates later in the day. Rates for overnight, seven-day, and one-month standing lending facilities were all trimmed by 10 basis points.
An economist described China as facing a “confidence crisis,” with Beijing’s perceived policy delay being interpreted as inaction to stimulate growth. Oxford Economics’ lead economist, Louise Loo, characterized July’s data as “very horrible” and emphasized the need for swift stimulus measures.
China’s policymakers have recently taken steps to boost consumption, private sector investment, and foreign investment, but their overall approach to additional stimulus has been cautious and targeted towards specific areas of the economy. Loo doubts whether these measures are enough to improve consumer and business sentiment.
Goldman Sachs analysts expect more easing measures to be implemented in the coming months, including monetary, fiscal, housing, and consumption initiatives, although the extent of the stimulus is expected to be smaller than previous cycles.
China’s property market remains a cause for concern as the country grapples with a slump. Developer Country Garden is on the verge of default, causing nervousness among investors. Some economists believe the property sector is due for a correction.
Looking ahead, China’s focus on economic recovery is shifting towards lifting industrial production and business sentiment. The government will have to navigate these challenges in the coming quarters.
Overall, China’s consumption-driven economic recovery appears to be fading, prompting a shift in priorities. The government will need to address these issues moving forward.
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