China cuts key interest rates as economy falters in July

Business & Technology

China’s economy delivered poor results across the board last month, renewing Beijing’s efforts to double down on support. Will it be enough?

Illustration by Derek Zheng

Beijing slashed two key interest rates in a surprising effort to prop up China’s economic growth, as the world’s second-largest economy continues to be bogged down by COVID-zero lockdowns and a deepening property crisis.

The People’s Bank of China on Monday cut both one-year and seven-day lending rates by 10 basis points, the first cut since January. It also injected an extra 400 billion yuan ($60 billion) into lending markets.

  • “The momentum of economic recovery has slowed,” said government spokesman Fù Línghuī 付凌晖 at a news conference. “More efforts are needed to consolidate the foundation of economic recovery.”

The cut comes as China’s economy delivered poorer-than-expected results across the board in July, the National Bureau of Statistics (NBS) reported today, stoking officials’ anxieties over declining consumer demand. Last month, officials effectively acknowledged that China cannot hit this year’s official 5.5% growth target, despite announcing it as a key priority in March.

  • Retail sales, a key gauge of consumer spending, rose only up to 2.7% year-on-year, falling short of the government’s 5% forecast and a decrease from the 3.1% year-on-year reported in June.
  • Fixed-asset investment (FAI) for the first seven months of the year rose by 5.7% from a year ago, missing expectations for 6.2% growth.
  • Industrial production rose 3.8% from a year ago, lower than June’s 3.9% and below a 4.3% forecast.
  • One in five Chinese youth, or 19.9%, was jobless in July: Young urbanites aged 16 to 24 years faced their fourth consecutive month of record-high unemployment, the highest level since records began in January 2018. However, the overall jobless rate edged down to 5.4% from 5.5%.

“Beijing’s policy support could be too little, too late, and too inefficient,” said Lù Tǐng 陆挺, Nomura’s chief China economist. The poor economic results have come despite an increase in government spending, with infrastructure FAI rising 11.5% year-on-year in July.

  • In June, China’s powerful economic planning authority, the National Development and Reform Commission (NDRC), approved 10 fixed-asset investments worth 121 billion yuan ($18.1 billion) in an attempt to revive the economy.

The widespread challenges also come at a sensitive time for Chinese leader Xí Jìnpíng 习近平, who is expected to seek a third term in power this fall.

  • Authorities scrambled in July to stop contagion from a growing number of furious homeowners who refused to pay their mortgages on unfinished homes.
  • Several small protests broke out in Hainan, after the tropical tourist destination locked down over a COVID outbreak, leaving tens of thousands of travelers stranded.

Nadya Yeh