China cuts key rates as weak batch of July data darkens economic outlo

China cuts key rates as weak July data dampens economic outlook

BEIJING (Reuters) - A broad set of Chinese data on Tuesday highlighted mounting pressure on the economy from multiple fronts, prompting Beijing to cut key interest rates to boost activity, but analysts say more support is needed to revive growth.

Less than an hour before releasing a batch of July data, China's central bank unexpectedly cut key interest rates for the second time in three months, underscoring the rapid loss of a post-Covid economic recovery that has rocked global financial markets.

A batch of data released by the National Bureau of Statistics (NBS) on Tuesday, adding to a string of weak indicators from last week, showed that retail sales, industrial production and investment grew more slowly than expected, pointing to the engines of business and consumption in the world's second-largest economy were seriously undersized. "All the main measures of activity were below consensus expectations in July, with most of them flat or barely growing month-on-month," said Julian Evans-Pritchard, economist at Capital Economics.

"And with the financial problems of developers such as Country Garden likely to weigh on the housing market in the near term, there is a real risk that the economy will slide into recession if political support does not increase soon." Nomura analysts were equally disappointed about China's economic outlook. "We believe China's economy faces an imminent downward spiral with the worst yet to come, and this morning's rate cut will be of limited help," they said.

Most economists see the risk of a decline in China's growth, but do not expect a recession.Industrial production rose 3.7% from a year earlier, slowing from the 4.4% pace recorded in June, NBS data showed, and was below expectations for a 4.4% rise in a Reuters poll of analysts.

Retail sales, a measure of consumption, rose 2.5% from a 3.1% rise in June and missed analysts' estimates of 4.5% growth despite the summer travel season. It was the slowest growth since December 2022 and shows how big a challenge the authorities face as they try to make consumption a key driver of future economic growth.Asian stocks settled at one-month lows, with the yuan hitting a 9-month nadir while the dollar was broadly steady after weak Chinese data and the latest policy easing measures.

After the rate cut, China's big state banks were seen selling U.S. dollars and buying yuan in a bid to stem the currency's rapid decline, three people with direct knowledge of the matter said. Treasury yields fell to three-year lows and benchmark stock indexes fell.

Record-low credit growth and rising risks of deflation in July prompted further monetary easing to stem the slowdown, market watchers said, while default risks at some housing developers and missed payments by private wealth managers also dented market confidence. Nie Wen, an economist at Hwabao Trust, expects special bonds to be introduced quickly, and said the probability of a reduction in the minimum reserve ratio (RRR) in the short term is quite high.

Politicians unveiled a raft of stimulus measures last month, from boosting consumption of cars and home appliances, easing some restrictions on real estate to promising support for the private sector, as the post-Covid recovery quickly lost steam from the second quarter.

The food service sector, which benefited from the COVID reopening, saw slower revenue growth in July from June. Private sector investment fell 0.5% in the first seven months, extending a 0.2% decline in the first half of 2023.

The lingering drag on the real estate sector, increasing pressure on local government debt, high youth unemployment and cooling foreign demand remain major obstacles to supporting a sustainable economic recovery. China is undergoing a painful transition to a less debt-driven, less property-focused and more consumer-driven economy, said Robert Carnell, head of Asia Pacific research at ING.

"We will continue to see weak macro data for the foreseeable future. This is a necessary part of the adjustment and is much better than resurrecting the debt-fueled real estate model that previously drove growth. But we need to lower our expectations for China's growth." ."

Other data on Tuesday showed that investment in fixed assets rose 3.4% in the first seven months of 2023 compared with the same period a year earlier, against expectations for a 3.8% rise. It grew by 3.8% in the period from January to June.

Investment in the real estate sector fell 8.5% year-on-year in January-July after falling 7.9% in January-June, extending its decline for the 17th straight month. The unemployment rate based on the national survey rose slightly to 5.3% from 5.2% in June. After the youth unemployment rate rose to a record 21.3% in June, the NBS suspended publication of the youth unemployment rate from August.

China has set its growth target for 2023 at around 5%, but Nomura analysts warn that the country could miss the target again, as it did last year.” We also see more downside risk to our forecast of 4.9% year-on-year growth for third and fourth quarters. it is increasingly likely that annual GDP growth will exceed 5.0% this year.