Lockdowns due to China’s strict corona policy, gloomy economic expectations worldwide and a lingering crisis in the real estate sector – a key growth driver – are hampering the economic recovery that should have happened in July. Hoping that more liquidity will encourage companies to engage in more activity, such as hiring new staff, the central bank on Monday cut the interest rate on medium-term loans to banks to 2.75 percent. This serves as a signal to the state banks to adopt a more flexible lending policy.
An additional $60 billion cash injection into the capital market has the same goal, but experts tell the British business newspaper Financial Times that these efforts may be ‘too small and too late’. These measures are expected to be the first steps towards further interest rate cuts for existing loans, for example, so that the pressure of old debts on companies and governments will decrease.
“The momentum of economic recovery has slowed,” a spokesman for the Chinese statistics bureau said during the presentation of the disappointing data. The Chinese economy narrowly escaped contraction in the second quarter and performed less than expected across the board. In the spring, when the contagious omikron variant paralyzed trade and industrial cities like Shanghai and the growth forecast was revised negatively to 5.5 percent, analysts thought the economy would recover in the summer. So that’s disappointing.
Economy grows half as fast as expected
Store sales, an indicator of consumer spending, only started to pick up slightly in June. The growth is only 2.7 percent, while 5 percent was expected. In areas struggling with virus outbreaks, the population is not allowed to go out to shop. Online shopping is hampered by factory delays and corona rules that make it difficult to deliver goods.
Spending money on summer holidays, where shopping is a popular leisure activity, is also less attractive due to the risk of getting stuck at the holiday destination due to a covid outbreak. Freedom-restricting corona measures can even be imposed after a visit to a shopping center where an infected person has also been.
Activity was also disappointing in the industry, which was the driver for a speedy recovery after the first Chinese corona wave in 2020. Instead of the predicted 4.6 percent, industrial production grew by only 3.8 percent. A slight increase in exports is the only bright spot in an otherwise gloomy series of figures. However, factories in outbreak areas continue to struggle with production problems and logistical difficulties in shipping their products due to virus outbreaks.
Stimulate lukewarm borrowing behavior
Despite the negative impact of the strict zero-covid policy on the economy, the Communist Party leadership stated in July that it would stick to it, while the party leadership in the same statement dropped this year’s growth rate of 5.5 percent. That would mean that despite a previously announced stimulus package for government investment and infrastructure, China may fall short of its economic targets for the first time since 2015.
The unexpected interest rate cut by the central bank should stimulate the lukewarm lending behavior of companies and households. On Friday, it turned out that the number of new loans taken out was disappointing despite an earlier interest rate cut in January. Previously, the slightest easing sparked a loan rush that has made the debt mountain of governments, businesses and households so great that the debt crisis is itself a serious economic risk.
Afraid of a hard push
Certainly since last year the real estate sector ended up in a lingering crisis due to the default of real estate giant Evergrande, Beijing has been afraid of giving the economy a hard push forward with easy money flows. The government has been trying for years to get rid of the hangover from the mega-stimulus that kept the economy afloat during the global financial crisis in 2008 by tightening lending policies. But as soon as the economic downturn, Beijing will partially or completely offset the effects of those efforts with new stimulus measures.
The problem at the moment is that a recession is looming, as businesses and consumers are now cutting their purse strings out of fear of a poor economic outlook. Another concern is the new unemployment figures. The youth unemployment rate, which had already risen sharply earlier this year, rose even further to almost 20 percent, breaking all records. Ensuring sufficient jobs is a crucial government task in a country that hardly has a social safety net for people without income.