China cuts interest rates as Covid-19 and housing crisis put economy in check

China’s central bank cut interest rates on Monday, as new data showed the economy lost steam in the past month because of renewed Covid lockdowns and an ever-widening slowdown in the housing sector.

The People’s Bank of China reduced 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 credit 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 were cut.

The move took investors by surprise. Previously, the central bank appeared reluctant to cut rates further amid concerns about the risk of rising debt, consumer inflation and pressure on the yuan despite the economic slowdown in the April-June quarter.

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

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

The economic data published on Monday for July was much worse than expected.

Retail sales grew 2.7% in July from a year earlier, slowing from June’s 3.1% growth, the National Bureau of Statistics said. That number fell short of the 5% increase predicted by economists in a Reuters poll.

Industrial production grew 3.8% in July from a year earlier, down from the 3.9% growth in June. It also missed the market’s expectation of a 4.6% increase.

In addition, the housing crisis intensified further. Real estate investment by developers contracted 6.4% in the first seven months of this year, accelerating from a 5.4% drop in the first half, NBS data showed. Meanwhile, new home prices in 70 major cities fell for the 11th straight month in July.

“July data suggests that the post-lockdown recovery lost steam as the one-time push for reopening failed and mortgage boycotts triggered a renewed deterioration in the housing sector,” said Evans-Pritchard of Capital Economics.

Beijing’s uncompromising stance on eradicating the virus led to months of lockdowns in dozens of cities across the country, including Shanghai, the country’s financial and transport hub, earlier this year. Businesses were disrupted, factories were closed and millions of residents were confined to their homes, leading to a severe disruption of economic activity.

Authorities began reopening the economy in early June, lifting restrictions in some key cities. The manufacturing and service industries showed signs of improvement after the moves.

But several cities soon reinstated Covid restrictions in late June as authorities struggled to contain the spread of the BA.5 subvariant of the coronavirus. According to a more recent survey by Nomura, 41 cities had implemented lockdown measures by July 18, up from 31 cities the week before.

Problems in the real estate sector, which accounts for up to 30% of China’s GDP, are putting significant pressure on the economy.

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

The real estate market was already suffering from a prolonged fall in prices and a liquidity crisis that engulfed some of the largest developers in the country.

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

Evans-Pritchard said it was unclear whether the rate cuts would be enough to revive the recovery 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 problems that cannot be easily resolved by monetary policy,” he added.

Fu Linghui, a spokesperson for the NBS, also expressed concerns on Monday about extreme heat and rains that are affecting food production and causing inflation in the country.

A heat wave has swept through China since June, pushing temperatures above 40 degrees Celsius in dozens of cities and affecting more than 900 million people.

Meanwhile, heavy storms also brought severe flooding and landslides in some provinces.

“Affected by continued high temperature in many places, the price of fresh vegetables has increased by 12.9% year-on-year, which was significantly higher than the same period in previous years,” Fu told a news conference on Monday. in Beijing.

He highlighted that extreme heat has caused droughts in some agricultural areas in the south. In the north, rains and floods also resulted in some crop failures.

“August and September are the key periods for the formation of autumn grain production. [Devemos] be aware of the impact of natural disasters, insects and diseases on our country’s food production,” he added.