China economic data points to slowdown

With falling production of processed foods, textiles, and general equipment, China's manufacturing output increased by only 2.7% in July.

Furthermore, numerous Chinese localities have reinstated economic restrictions due to a rise of COVID-19 infections. Mobility has decreased as a result of this. China continues to practice a zero-tolerance policy that results in significant economic restrictions despite the fact that the country's infection rate is approximately 300 times lower than that of the United States. This is true even though China's infection rate is still significantly lower than that of most other nations.

These limit s, according to Mr. Ira Kalish, Chief Global Economist at Deloitte Touche Tohmatsu, probably contributed to the slowdown in economic activity in July. Consumers and businesses alike are discouraged by restrictions from making and investing in purchases. The data shows that everything is true.

According to the government, retail sales increased 2.7% from a year earlier in July, which was slower than the previous month and, aside from the most recent period of intense lockdowns, one of the slowest growth rates in recent years. Sales of clothing, furniture, and construction supplies all fell. Cosmetics and personal care product sales barely increased. "This performance was well below what most analysts had predicted. According to Mr. Ira Kalish, this indicates underlying weakness in aggregate demand.

The government also revealed that industrial production increased 3.8% in July compared to the same month last year, which was slower than the previous month. This as well astonished onlookers. With falling production of processed foods, textiles, and general equipment, manufacturing output increased by only 2.7%. On the other hand, the production of cars saw a significant increase.

Investment in fixed assets slowed down even further in July. Investment increased modestly from a year ago in the first seven months of 2020, at a slower rate than in the first six. The government's stimulus caused a significant 9.6% increase in infrastructure spending. However, compared to a year before, real estate investment decreased by 6.4%, while real estate sales decreased by 28.8%. That portends poorly for more construction in the coming months. According to the most recent data on the real estate market, home prices in the 70 major cities nationwide decreased 0.9% in July compared to the same month last year. This is the third consecutive month of fall and the greatest decline since September 2015.

Given that property ownership is a major form of saving for millions of households, the decline in property prices means a loss of wealth that can influence spending decisions. Interestingly, prices were up modestly in China’s largest cities, indicating an even sharper decline in second-tier cities.

In response to the evident weakness in the economy, the PBoC cut the medium-term lending rate by 10 basis points, the first such decline since January. It also cut the seven-day reverse repo rate by 10 basis points, the first such action since January. “These moves, while modest by the standards of other major central banks, were significant in China. They likely reflected deep concern about the state of the economy and a desire to jumpstart demand”, said Mr. Ira Kalish.

Moreover, they reflect a shift in focus. That is, in recent months, the PBoC, while slightly easing monetary policy, has been reluctant to take stronger action due to fear of inflation—which has, in fact, accelerated. Now, with the economy clearly weak, the PBoC is embarking on a somewhat different policy.

“Interestingly, the PBoC is evidently less focused on the exchange rate than previously. After all, as the interest-rate differential with the United States widens, there is more impetus for outflows of capital from China, thereby leading to downward pressure on the currency. This can only be offset by selling foreign currency reserves. A weakening currency can be inflationary, but that is clearly not the primary focus of the PBoC at this time”, said Mr. Ira Kalish.

In any event, the question remains as to whether demand can be stimulated within the context of COVID-19–related economic restrictions. Indeed, the government cited COVID-19 restrictions as one of the causes of slow growth. Already, the government reported that bank lending weakened in July. Will monetary easing, which is meant to stimulate credit activity, offset the impact of COVID-19–related restrictions? Time will tell.

The IMF downgraded China's growth to 3.3 per cent in 2022, the lowest level in more than 40 years, and to 4.6 per cent in 2023, a half-percent lower than it was in the previous outlook in April, the report said. This forecast comes as the IMF report has predicted that global growth will decrease to 3.2 per cent this year and further to 2.9 per cent in 2023.