China’s economy unexpectedly slowed in July, with factory and retail activity squeezed by Beijing’s zero-Covid policy and the property crisis, while the central bank surprised markets by cutting key lending rates to revive demand.
Industrial production in July rose 3.8 percent from a year earlier, slightly less than June’s 3.9 percent, data from the National Bureau of Statistics (NBS) showed. That compared with a 4.6 percent increase expected by analysts in a Reuters poll.
Retail sales, which only turned positive in June, rose 2.7% from a year earlier, well above analysts’ forecast of 5% growth and below the 3.1% increase seen in June.
The world’s second-largest economy narrowly avoided a contraction in the June quarter, hampered by the blockade of the Shanghai trade hub, a deepening slump in the property market and persistently low consumer spending.
However, risks to growth abound as many Chinese cities, including manufacturing hubs and popular tourist spots, imposed lockdown measures in July after new outbreaks of the more portable Omicron variant were discovered.
“The risk of stagflation in the global economy is increasing and the basis for domestic economic recovery is not yet solid,” the NBS warned in a statement.
The property sector, which was further shaken by a mortgage boycott that weighed on buyer sentiment, worsened in July. Property investment plunged 12.3% in July, the fastest pace this year, while the drop in new sales deepened to 28.9%.
Chinese policymakers are trying to strike a balance between supporting a fragile recovery and rooting out emerging Covid clusters, with the economy expected to miss its official growth target this year – set at around 5.5% – for the first time since 2015.
“All economic data was disappointing in July, except for exports. Loan demand from the real economy remains weak, suggesting a cautious outlook for the coming months,” said Ni Wen, a Shanghai-based economist at Hwabao Trust, adding that the Covid outbreaks and heatwaves in July weighed on activity.
“It now looks increasingly challenging to even achieve 5-5.5% growth in the second half.”
The employment situation remains unstable. The unemployment rate, based on a national survey, eased slightly to 5.4 percent in July from 5.5 percent in June, although youth unemployment remained stubbornly high, reaching a record 19.9 percent in July.
To support growth, the central bank unexpectedly cut interest rates on key lending facilities on Monday for the second time this year. New yuan lending fell more than expected in July as companies and consumers remained wary of taking on debt, data showed on Friday.
Wang Jun, an economist at Zhongyuan Bank, believes the authorities will focus on implementing existing policies rather than introducing aggressive new stimulus.
“We are now facing a typical liquidity trap problem. As free as the credit supply is, companies and consumers are wary of taking on more debt,” Wang said. “Some of them are already paying back their debt in advance. This could be a harbinger of a recession.”
Investment in fixed assets, which Beijing had hoped would boost growth in the second half as exports softened, rose 5.7 percent in the first seven months of the year from the same period a year earlier, versus a forecast 6.2 percent rise. and down from a 6.1% jump in January-June.
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