Chinese economy ‘in desperate situation’

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China today cut a key interest rate as new data confirmed the slowdown in the world’s second-biggest economy.

The People’s Bank of China unexpectedly reduced the medium-term lending rate — through which it provides one-year loans to the banking system — by 10 basis points to 2.75 per cent, the first reduction since January and highlighting anxiety in Beijing over shrinking consumer demand.

The country’s economy barely escaped contraction in the second quarter, according to new data released after the central bank decision, as consumer and factory activity faltered in the face of repeated pandemic lockdowns.

Retail sales and industrial production rose but by much less than expected, while youth unemployment hit a record 19.9 per cent. Growth in the second half of the year is likely to be further hindered by Beijing’s zero-Covid strategy and a slowdown in exports.

Chinese stocks fell on the disappointing data, setting them on a different path from rising equity markets in other major economies such as in the US and denting confidence in investors’ global outlook.

Several Chinese cities are experiencing new or extended lockdowns and in Shanghai authorities are testing drones to ensure residents scan their health codes on a compulsory smartphone app — dubbed “digital handcuffs” for their use in social control — when entering a building.

Falling consumer confidence has been highlighted by weakening sales of high-end goods, such as the market for second-hand luxury watches and bags. Rising geopolitical tensions are also worsening the outlook for industries such as semiconductor manufacturing, while demand for chips used in smartphones and consumer electronics has slumped.

Chinese investors, hit by market sell-offs and widespread defaults in the country’s stricken property market, have been seeking alternative assets such as jade, while cash-strapped consumers have started a new trend for soon-to-expire food.

Inflation, while lower than in other major economies, remains at its highest level in two years, according to data published last week.

Lockdowns and strict quarantine regulations however remain the main drivers of the new pessimism. To take just one recent example, Hong Kong’s international schools are struggling to hire teachers ahead of the new academic year.

“China is definitely in a very desperate situation,” said Xingdong Chen, an economist at BNP Paribas. “The problem now is no effective demand. If you don’t allow people to come out and consume . . . there is no demand.”

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