China unexpectedly cuts medium-term lending facility

China unexpectedly cut the medium-term lending facility (MLF) by 15bps to 2.5%. This is the biggest cut since 2020. This action is to provide support to an economy that is currently grappling with renewed challenges stemming from a deteriorating property market and sluggish consumer expenditure.

Taking a step back, the decisions made today are helpful. They make it easier for struggling local governments and real estate companies to handle their debts. But these changes will not completely change the situation. So, we are not too sure of a substantial upswing in market sentiment solely due to the development.

Interestingly, this unexpected decision was made just before the unveiling of economic activity data for the month of July. This data has proven to be disappointing, revealing a widespread decline in growth for consumer spending, industrial output, and investment. Additionally, the report highlights a rise in unemployment figures.

Industrial production printed at 3.7% y/y, lower than the 4.3% y/y expected, and retail sales were only 2.5% y/y whereas 4.2% y/y was the forecast. This comes a week after data showing slow trade numbers, poor consumer price figures, and the lowest credit growth on record.

Moreover, China, continues to deal with a persistent decline in its substantial real estate industry, which is affecting its economy. The challenges in the property market are back in the spotlight as developer Country Garden is now at the edge of a potential default

Edit: The rate for the overnight standing lending facility (SLF) has been reduced by 10 basis points to 2.65%. Additionally, the rates for the 7-day and 1-month SLF have each been lowered by 10 basis points, now standing at 2.80% and 3.15% respectively. This adjustment comes after an earlier reduction in the medium-term lending facility (MLF) rate.