China’s central bank started the week with a big surprise: slashing key lending rates by 10 basis points – despite signaling just a few days ago It has no immediate plans to cut rates.
The shift caught markets and analysts off guard and showed Beijing is battling the coronavirus outbreak, imposing pandemic lockdowns and dealing with a housing collapse.
In a report last week, the People’s Bank of China strongly suggested that the country must not “easily let down its guard” without flooding the economy with excess liquidity and facing inflation risks.
Will the rate cut boost the Chinese economy?
Official economic data for July released on Monday painted a worrying picture.
Retail sales, industrial output and fixed asset investment were all significantly lower than expected last month. According to the National Bureau of Statistics, home sales fell 28.6% year-on-year and real estate investment fell 12.3% year-on-year. Crude steel production fell 6.4%. The youth unemployment rate climbed further to a record 19.9%.
This means that the banking authorities’ concerns about inflation must now give way to the more pressing task of trying to speed up the country’s economic engine.
Bloomberg columnist Daniel Moss wrote that “with economic growth struggling and demand for credit falling, the People’s Bank of China has made it clear that [economic] recovery must be a priority”. “Rising prices may be worrying, but it’s the second issue right now. Beijing has to consider the dire prospect.”
More rate cuts may be coming. Whether such monetary easing will help boost economic activity in China is another question.
“A cut in the LPR later this month is a foregone conclusion and we expect more easing in the future, although it is unclear whether this will be enough to boost credit Growth has recovered,” Capital Economics’ Julian Evans-Pritchard wrote in a note today.
Poor bank lending data suggests that rate cuts alone won’t quell underlying pessimism. Chinese banks added 679 billion yuan ($101 billion) in new yuan loans last month, less than a quarter of what they did in June. However, economic uncertainty is largely driven by the unpredictability of China’s coronavirus lockdown, which has meant businesses are reluctant to borrow, invest and hire. Cheap credit won’t solve this problem.
“Businesses and households appear to be borrowing less out of fear of a weaker economy,” senior researcher Michael Pettis wrote. Carnegie Endowment for International Peace.
“In other words, the problem is lack of domestic demand, not expensive capital.”