Why the Central Bank of China has lowered rates
by Marco Dell'Aguzzo
Given negative data on demand, industrial production and youth unemployment, China's central bank cut interest rates for the first time since January. All data and expert opinions
On Monday, the People's Bank of China, or the central bank of China, cut interest rates on annual loans by 10 basis points to 2.75 percent. This is not only the first reduction since last January, but also a move contrary to the forecasts of analysts, who did not expect changes from the institute.
Chart via Quartz.
LOCKDOWN, REAL ESTATE CRISIS AND LOW GLOBAL GROWTH
According to the Financial Times, the central bank's decision highlights Beijing's growing anxiety both about the decline in consumer demand caused by the strict policy of containing coronavirus infections (dubbed precisely "zero-COVID"), and the impacts of the liquidity crisis of real estate development companies and the slowdown in global economic growth.
HOW CHINA'S ECONOMY IS DOING: THE DATA
Official statistics released on Monday show worse-than-expected levels of consumer demand and industrial activity. The youth unemployment rate reached 19.9 percent, a record.
In July, retail sales (an important indicator of consumption) increased by only 2.7 percent, compared to forecasts of 5 percent. Industrial production grew by 3.8 percent, while forecasts indicated a +4.6 percent.
WHY THE PRICE OF OIL FALLS
News of the slowdown in the world's second-largest economy has led to a 4.6 percent drop in crude oil prices, of which China is a major consumer and importer.
WHAT EXPERTS THINK
Despite massive (in the order of hundreds of billions of dollars) capital injections to stimulate growth, in the second quarter of the year the Chinese economy avoided contraction only slightly.
According to experts, this slowdown will cause the authorities to "ease" monetary policy, but some of them are pessimistic. For example, Ting Lu – Nomura's China economist – told the Financial Times that "Beijing's support may be too low, too late and too inefficient": the country's growth in the second half of the year, according to him, will therefore be "significantly hampered by its zero-COVID strategy, the negative spiral of real estate markets and a probable slowdown in export growth".
Other analysts argue that the central bank's interest rate cut is an important signal of Beijing's willingness to continue stimulating the economy through monetary policy rather than focusing on inflation.
THE (NEGATIVE) OPINION OF SOCIÉTÉ GÉNÉRALE
The Société générale bank defined the July data as "simply negative", putting the emphasis on the deceleration of production, investment and consumption due to the "crushing weight of the zero-COVID policy" and the "real estate sector in free fall".
According to the bank's economists, "[Chinese] policymakers have begun to communicate their concerns about overstimating the economy with too much liquidity, while in our view the real risk is just the opposite: too little easing and too weak a recovery."
ZERO-COVID
President Xi Jinping's zero-COVID policy is to impose strict lockdowns whenever coronavirus outbreaks are detected. Over the weekend, there was an increase in cases nationwide, and in several cities in the country – in Haikou and Urumqi, for example – restrictions on travel and activities were imposed or prolonged. In Shanghai, authorities are testing the use of drones to monitor citizens and make sure they scan their "health codes" when they enter a building; these codes are recorded in a smartphone application and are used to determine whether or not a person is positive for the virus, and whether he can then move around the city.
WITH LOCKDOWNS "THERE IS NO DEMAND"
Xingdong Chen, economist and head of BNP Paribas' China section, told the Financial Times that "China is certainly in a very desperate situation. The problem is that there is no actual demand. If you don't allow people to go out and consume... there is no demand."