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The disappointing economic backdrop to China's policy dilemma

Economy Aug 16, 2022 07:07AM ET
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© Reuters. FILE PHOTO: Headquarters of the People's Bank of China (PBOC), the central bank, is pictured in Beijing, China September 28, 2018. REUTERS/Jason Lee

By Patturaja Murugaboopathy

(Reuters) - China's central bank cut its interest rates on Monday for the second time this year, but analysts suspect it will do little to spur lending in an economy awash with cash but lacking in consumer demand and business confidence.

The People's Bank of China (PBOC) lowered the rate on its one-year and 7-day lending facilities by 10 basis points after a string of data for July painted a gloomier economic picture than previously.

(Graphic: China's borrowing costs cut - https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwyaogvo/China%20borrowing%20costs%20cut.jpg )

Housing prices fell. Property investment also sank and new construction was weak.

(Graphic: China's housing prices fall - https://fingfx.thomsonreuters.com/gfx/mkt/egvbkdqowpq/china%20housing%20prices.jpg )

China's retail sales grew 2.7% in July, compared with 3.1% in June, pointing to slowing consumer spending.

(Graphic: China's retail sales -https://fingfx.thomsonreuters.com/gfx/mkt/dwpkrwlzbvm/China%20retail%20sales.jpg )

Industrial production also missed expectations. Concerns over fresh COVID-19 flare-ups, worries about jobs and the crisis in the property sector have dented borrowing by companies and consumers.

Chinese banks extended 679 billion yuan ($101 billion) in new yuan loans in July, less than a quarter of June's amount, according to data released by the PBOC last week.

(Graphic: China's social financing - https://fingfx.thomsonreuters.com/gfx/mkt/xmvjomenapr/China%20social%20financing.jpg )

Most of China's recent monetary and fiscal stimulus has been flowing into savings. Chinese households added 10.3 trillion yuan in deposits in the first half of 2022.

(Graphic: China's bank deposits - https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnazlmvq/China%20bank%20deposits.jpg )

According to Refinitiv Lipper, the total net assets of Chinese mutual funds has surged to a record $1.58 trillion at the end of June, 6.7% higher than at the start of the year.

(Graphic: Chinese money market mutual funds have the second biggest asset size - https://graphics.reuters.com/GLOBAL-MARKETS/gkplgoalmvb/chart.png )

In the stock market, outstanding margin loans have climbed to a four-month high of 1.64 trillion yuan, while equity mutual funds have attracted $7 billion in the last two months.

(Graphic: China margin lending https://fingfx.thomsonreuters.com/gfx/mkt/xmpjomebavr/China%20margin%20lending1.jpg )

The disappointing economic backdrop to China's policy dilemma
 

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