NEW DELHI: World's second largest economy is moving towards an economic slowdown. Persisting geopolitical challenges, inflation and resurging cases of Covid-19 has put the Chinese economy under pressure.
Data shows China's growth slowed unexpectedly in July. The recent power shortage and the unprecedented hot weather across the country have added to the challenges which the economy faces.
This loss of growth momentum has come as a concern to the policymakers.
To spur growth, China's central bank (PBOC) is expected to lower its benchmark lending rates, even though there is little room due to inflation situation in the country.
Zero Covid policy battered economy
China's zero tolerance for Covid and the disruptive measures being taken to contain any flare-up has proved to be a bane for the economy. The impact is both direct and indirect, hampering both supply and sentiments.
As of August 15, 22 cities accounting for 8.8% of China's gross domestic product, were under full or partial lockdowns, according to Nomura.
The containment measures have surely crushed the morale of the people. Consumer sentiments have weakened, the property sector is witnessing its own challenges, thereby reducing the scope of investments further.
At the start of this week, a video went viral on social media which showed people running away from an Ikea store in Shanghai in fear of being quarantined. The store was locked down when health authorities came to know that a close contact of a child infected with Covid-19 had visited the store.
Where does economy stand
The growth figures indicate that the world's second largest economy is struggling to shake off the June quarter hit due to strict Covid restrictions, prompting some economists to downgrade their projections.
China's economic growth slowed sharply in the second quarter, expanding 0.4% year-on-year and missing expectations, as widespread lockdowns to curb record Covid cases during the quarter hit industrial activity and consumer spending.
Industrial output grew 3.8% in July from a year earlier, according to the National Bureau of Statistics (NBS), below the 3.9% expansion in June and a 4.6% increase expected by analysts in a Reuters poll.
Retail sales in July, which had just returned to growth in June, rose 2.7% from a year ago, missing forecasts for 5.0% growth and the 3.1% growth seen in June.
"The July data suggests that the post-lockdown recovery lost steam as the one-off boost from reopening fizzled out and mortgage boycotts triggered a renewed deterioration in the property sector," said Julian Evans-Pritchard, senior China economist at Capital Economics.
China's economy narrowly escaped a contraction in the June quarter, hobbled by the lockdown of the commercial hub of Shanghai, a deepening downturn in the property market and persistently soft consumer spending.
Risks still abound as many Chinese cities, including manufacturing hubs and popular tourist spots, imposed lockdown measures in July after fresh outbreaks of the more transmissible Omicron variant of the coronavirus.
Fixed asset investment, which Beijing hopes will compensate for slower exports in the second half, grew 5.7% in the first seven months of 2022 from the same period a year earlier, versus a forecast 6.2% rise and down from a 6.1% jump in January-June.
The employment situation remained fragile. The nationwide survey-based jobless rate eased slightly to 5.4% in July from 5.5% in June, although youth unemployment stayed stubbornly high, reaching a record 19.9% in July.
China rate cut
At a time when central banks of most major economies are raising benchmark lending rates as a measure to curb soaring prices of commodities in their respective countries, the central bank in China has slashed the rates.
The People's Bank of China (PBOC) cut its benchmark lending rate and lowered the mortgage reference by a bigger margin on Monday, adding to last week's easing measures.
The one-year loan prime rate (LPR) was lowered by 5 basis points (bps) to 3.65% at the central bank's monthly fixing on Monday, while the five-year LPR was slashed by 15 bps to 4.30%.
The one-year LPR was last reduced in January. The five-year tenor, which was last lowered in May, influences the pricing of home mortgages.
Last week, the loan prime rate was unexpectedly cut on 400 billion yuan ($59.33 billion) of one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points (bps) to 2.75%.
The move was taken to revive demand amid squeeze in factory and retail activity due to Beijing's zero-Covid policy and a property crisis.
Chinese policymakers are trying to balance the need to shore up a fragile recovery and eradicate new Covid-19 clusters.
The central bank also injected 2 billion yuan through seven-day reverse repos while cutting the borrowing cost by the same margin of 10 bps to 2.0% from 2.1% previously, according to an online statement.
Wobbly property market
The debt crisis in China's property sector has worsened in recent weeks after a growing number of homebuyers threatened to stop making mortgage payments on stalled property projects, aggravating a crisis that could lead to social instability.
The property sector's credit troubles risk seeping into secondary industries such as asset management companies, privately-owned construction firms and small steelmakers, said Fitch Ratings in an August note.
In fact, China's real estate sector has been lurching from one crisis to another over the past year, as it grapples with mounting liabilities, a slowing economy and flagging demand, while its sources of fresh fundraising have been drying up.
Some big private developers like Evergrande have already defaulted on offshore debt obligations and struggled to raise funds from other sources, including banks.
A recent report by UBS estimated the property crisis in China to get worse, wiping off $1 trillion from the global market.
In other words, what started as trouble with China Evergrande Group is now snowballing into a crisis that risks engulfing the majority of the country’s developers, its biggest lenders and a middle class that has significant wealth tied to the property market.
As a result, home sales tumbled 41.7% in May from a year earlier, with investment drop of 7.8%.
Fall in bank loans
China Banking and Insurance Regulatory Commission (CBIRC) is looking at banks' loan book exposure to property developers to find out if those credit decisions were made according to the rules, Reuters reported quoting sources.
The aim is to measure risks to the financial system from the ongoing property sector turmoil in the world's second-largest economy, two of the sources said. It was not immediately clear what action the regulator might take after the investigation.
The latest probe comes as policymakers have been trying to stabilise the property sector, which accounts for a quarter of the economy, after a string of defaults among developers on their bond repayments and a slump in home sales.
Property loans accounted for 25.7% of total banking sector credit in China as of end-June, central bank data showed. The banking sector's total outstanding loans was 206 trillion yuan ($30.3 trillion) at the end of the first half.
Commercial banks' non-performing loan ratio stood at 1.67% at the end of June, down from 1.73% at the beginning of this year, according to CBIRC data, though many analysts believe the real number is much higher.
New bank lending in China tumbled more than expected in July while broad credit growth slowed, as fresh Covid-19 flare-ups, worries about jobs and the property crisis made companies and consumers wary of taking on more debt.
Yuan near 2-year low
China's yuan slumped to a near two-year low against the dollar on Monday, as Beijing stepped up easing measures.
Currency traders and analysts said a firmer dollar and weaker domestic economic fundamentals both contributed to the yuan's declines.
The selling pressure on the yuan has grown since the PBOC surprised markets by cutting two key interest rates earlier this week, traders say.
Widening policy divergence, along with worries over weaker economic fundamentals, raised the risks of capital outflows and yuan depreciation.
Yuan's fall dragged down most emerging market currencies.
What is central bank doing
To prop up growth, the central bank on Monday unexpectedly lowered interest rates on key lending facilities for the second time this year. Analysts expect the cut is likely to lead to a corresponding reduction in benchmark lending rates next week.
Many believe the room for the People's Bank of China to ease policy further could be limited by worries about capital outflows, as the U.S. Federal Reserve, and other economies, aggressively raise interest rates to fight soaring inflation.
"Very sluggish credit demand in July on the back of weak activity growth, further deterioration in property indicators and lower-than-expected CPI inflation might have contributed to the PBOC's move," said analysts at Goldman Sachs.
Chinese policymakers are trying to balance the need to shore up a fragile recovery and eradicate new Covid-19 clusters. As a result, the economy is expected to miss its official growth target this year - set at around 5.5% - for the first time since 2015.
How it may impact India
When the 2nd largest economy of the world faces an economic downturn, it is sure to have an impact on other economies as well.
However, for India, the situation may be otherwise.
India could benefit from the lower oil prices. Since China is world's largest crude importer, the economic data released by their government sparked rumours of a recession, adding fuel to concerns over slowdown.
India may be able to benefit from this and lower its import bills, being a major oil importer itself.
Besides, China has been one of India's top trading partners since long.
Interestingly, of the $65 billion imports from China in FY21, around $39.5 billion were commodities and goods where India introduced the production-linked incentive (PLI) scheme like textile, agri, electronics goods, pharmaceuticals & chemicals.
In FY22 April-December period, there were 6,367 products with a total value of $68 billion (or 15.3 per cent of the total imports) imported by India from China.
In such a scenario, slowdown in China may hit India's inbound shipments too.
(With inputs from agencies)
