Chinese Authorities Provide Support to the Economy, but Stick to Modest Action So Far

Frail Recovery

The Chinese economy suffered in 2022, due to the strict measures to contain the Covid-19 pandemic, which suppressed factory output, trade activity and consumer spending. Authorities though shifted away from the stringent zero-Covid policy late-last year and the positive effect of the reopening manifested quickly.

After the initial boost however, a continued stream of underwhelming data from the world's second largest economy over the past several months, points to a frail recovery. GDP grew by a feeble 0.8% q/q in the second quarter and Factory activity has been contracting for four straight months, as manufacturing PMI came in at 49.3 in July.

Consumers meanwhile have been keeping their purses tight and the latest data showed further deterioration in July, as CPI inflation shrank 0.3% y/y, in the first negative print in more than two years. The situation is even gloomier on the producer side, which stayed on deflation territory for tenth straight month.

What's more, fears around the real estate market have resurfaced. Evergrande, the poster child of the recent property crisis, filed for bankruptcy in the US last week ^[1]. Rival Country Garden warned it could report a loss of up to RMB 55 billion (around 7.6 billion USD) for the first half of the year. ^[2]

Monetary & Fiscal Stimulus

The country's central bank (PBoC) has slashed a series of rates, in a concerted effort to provide liquidity and support the financial system. In the latest action today, it lowered the one-year prime loan rate (LPR) by a modest 10 bps, to 3.65%. This was the second cut in three months. However, policy makers left the five-year LPR unchanged, disappointing markets.

Authorities have also extended two recently implemented policies to help the housing market. ^[3] Furthermore, the Politburo has pledged to boost economic growth, with a series of measures aiming to expand domestic consumption, spur private investment, stabilize foreign trade and investments and optimize property policies. ^[4]

Modest Support

Chinese authorities are not standing idle and are trying to support the economy, but we have mostly seen promises and intentions on the fiscal front, rather that concrete actions. On the monetary front, there has been more robust activity, but still today's move by the PBoC was timid and underwhelmed markets.

Overall, we have seen modest support so far and looks like officials are reluctant to embrace bolder stimulus, but they may have to step up their efforts in order to support the waning recovery. This may not be so easy however, for a series of reasons.

The weak Yuan could limit the ability of PBoC to provide for further monetary easing. Furthermore, deep fiscal stimulus could raise questions around the country's sovereign rating. Speaking on Bloomberg, Managing Director of Fitch Mr McCormack said that the GDP/Debt ratio is "a little bit on the high side" for the country's rating ^[5]. Moreover, the geopolitical environment is unfavorable, as Sino-Western strained relations and trade wars, create growth headwinds.