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China's economy faces challenges: Weak data prompts central bank action

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2023-08-16

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The weak final data dump for July from China’s National Bureau of Statistics easily explains why the country's central bank popped up with a surprise rate cut, the second in three months on Tuesday.

In short, the figures for retail sales, investment, and production confirm the economy has drifted towards a black hole that was exposed by larger than expected falls in exports and imports in July, and the drop into deflation at a consumer price level (producer prices have been deflationary for months now).

And while it is accurate to say the rate cut of 0.15% in the one-year medium-term lending facility (or MLF) is aimed at helping the wider economy, the real target is the stricken property sector and parts of the financial system where bad debts, defaults, and falling prices loom as major dangers to the economy as a whole.

The People’s Bank of China cut the MLF in June by 0.10% and then followed that with a cut of 0.25% yesterday. The central bank also cut the seven-day reverse repo rate by 10 basis points to 1.8%. It had been cut to 1.9% in June when it cut the MLF and pumped billions of yuan into the money market to keep liquidity levels high.

Tuesday's cut means the central bank will chop its main lending rate, the Loan Prime Rate, next Monday from its current level of 3.55%.

The June cuts have failed to have any positive impact: retail sales, investment, and production are lower, and consumer price inflation, as well as exports and imports, are down as well.

Tuesday’s data drop underlined the weakness China now finds itself in - both currently and prospectively.

China's surveyed urban unemployment rate inched up to 5.3% in July 2023 from June's 16-month low of 5.2%. Remember, the youth unemployment rate is at a record 21.3% and is a more important indicator.

So delicate is the youth employment data that the National Bureau of Statistics said it has stopped publishing the figures as of July, citing the need to "further improve and optimize labor force survey statistics.”

"Starting from this August, the release of urban unemployment rates for youth and other age groups across the country will be suspended," National Bureau of Statistics spokesman Fu Linghui told a media conference on Tuesday.

Western economists said that was confirmation that the figure for youth joblessness was now very much a political problem for the government of President Xi Jinping, which also stopped publishing key data on Covid deaths and infections in 2022 when the pandemic was at its worst.

The decision added attention to the weak data releases made on Tuesday.

Retail sales increased by 2.5% year-on-year in July 2023, slowing from a 3.1% growth in June. This was the seventh straight month of an increase in retail trade, but the softest in the sequence. Retail sales data do not include services, which are reported to be doing well - except for property.

China's fixed-asset investment grew by 3.4% year-on-year in the first seven months of this year, easing from a 3.8% growth in the six months to June and missing market forecasts for a rise of 3.8%. State-owned companies lifted investment by more than 4%, while private companies dropped investment by 1%, which is a significant negative.

China's industrial production rose an annual 3.7% in July, slowing sharply from a 4.4% rise in June and below forecasts of 4.4%. Analysts blamed softer rises in manufacturing activity (3.9% vs. 4.8%) and mining output (1.3% vs. 1.5%). For the first seven months of the year, industrial output was up 3.8%.

Tuesday’s cut in the MLF and repo rate came after Chinese new bank loans plunged 89% in July from a month earlier to CNY 345.9 billion in July 2023, the lowest since late 2009. Outside of property, no one wanting to borrow money is a big worry.

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