China surprises with rate cut as economic numbers remain weak

Aug. 15, 2022 4:03 AM ETSHANGHAI Index (SHCOMP)HSIBy: Kim Khan, SA News Editor22 Comments

The people"s Bank of China

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China lowered two key lending rates and injected more cash into its economy Monday as it looks to keep stimulating the economy.

The country remains the global monetary policy outlier, with the rest of the major economies tightening in an effort to tame inflation.

The People's Bank of China cut its one-year lending facility rate by 10 basis points to 2.75% and cut the seven-day lending rate the same amount to 2%. The PBOC added 2 billion yuan through seven-day reverse repos.

Economists had expected the seven-year rate to stay steady. But policymakers are still clearly worried that risks are to the downside with strict COVID policies and weakness in housing, even though plenty of liquidity is stoking inflation pressures.

Later in the day, the government reported a batch of mostly disappointing economic data.

China July Industrial Production rose 3.8% y/y (vs. 4.6% expected) and slightly lower than the 3.9% figure reported in June.

Retail sales increased 2.7% in July compared with the same period in 2021, below the 5% forecast.

In addition, China's jobless rate for 16 to 24 year olds hit 19.9%, the highest ever recorded. And new house prices were down 0.9% y/y (vs. down 0.5% prior).

The Shanghai Composite (SHCOMP) was flat. The Hang Send (HSI) was down 0.5%. China bond yields were lower.

Rebound still seen: Still, the "question is no longer whether we get a rebound (in the Chinese economy), but how much of one," Morgan Stanley Economist Seth Carpenter wrote in a note.

"Covid-zero policies are slowly easing and we think more relaxation will follow the Party Congress in October," Carpenter said. "But will freedom of mobility be enough to reverse the challenges of the housing market? Recent policy action to address the housing crisis will help, but I fully expect that a much larger package will be needed."

"Ultimately consumer and property confidence will need to make a rapid recovery if the rebound can take shape," he added.

See SA Quant Rating's top picks in Chinese stocks.

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