China - July data disappoint, PBoC continues with piecemeal easing

China Macro: July activity data disappoint

In mid-July, China’s activity data – particularly retail sales – came in much stronger than expected. One month later, quite the opposite happened. The activity data for July published this morning were clearly weaker than consensus expectations. The biggest disappointment came from retail sales, with annual growth slowing to 2.7% (June: 3.1%, consensus: 4.9%). Industrial production growth was more or less stable compared to June, at 3.8% yoy (June: 3.9%, consensus: 4.3%). Fixed investment also slowed further, to 5.7% yoy ytd in January-July (Jan-June: 6.1%, consensus: 6.2%), with property investment once more contributing negatively. Meanwhile, the unemployment rate dropped further to 5.4% (June and consensus: 5.5%), but the youth unemployment rate rose to a new high of 19.9%. All in all, drags from virus flare-ups an ongoing strict Covid-19 policies (characterised by ‘mass testing and mini lockdowns under dynamic clearing’) and from property sector woes are constraining China’s rebound from the lockdown slump earlier this year. This is why we had already cut our annual growth forecast for 2022 further last month, to 3.7% (from 4.2%) – see for more background our previous comments here.

PBoC continues with piecemeal monetary easing

Probably reflecting the weaker than expected July data, the People’s Bank of China (PBoC) has cut the 1-year rate on its Medium-Term Lending Facility to 2.75%, from 2.85%. That brings the total reduction of this rate at 20bp so far this year. We think this makes it likely that the 1-Year Loan Prime Rate will be cut further next week. Last week, the PBoC tried to manage expectations by stating that it would not resort to massive stimulus. That said, the latest MLF rate cut is in line with our view of further piecemeal rate cuts to support the economic recovery from the lockdown slump earlier this year. While CPI inflation is indeed rising, largely driven by the turnaround in pork prices, at 2.7% yoy in July it is still relatively low in an international context, and remains below the central bank’s target of 3%. Moreover, cost price pressures continue to fade, with producer price inflation having fallen to a 17-month low of 4.2% yoy in July. Lending growth was weak in July, which partly reflects seasonal effects (lending growth always drops in July), but also weak loan demand. This reflects to a large extent the state of the real estate sector, as we have explained before. All in all we expect the PBoC to continue with piecemeal monetary easing, but we also anticipate the authorities will take bolder steps to stabilise the real estate sector in an attempt to mitigate systemic risks and safeguard growth.