China’s Economic Recovery Weakens Amid Fresh Covid Flareups

(Bloomberg) --

China's economic recovery unexpectedly weakened in July as fresh Covid outbreaks across the country weighed on consumer and business spending, clouding the growth outlook further and prompting the central bank to deliver a surprise interest rate cut.

Industrial production rose 3.8% from a year ago, the National Bureau of Statistics said Monday, lower than June's 3.9% and missing economists' forecast of a 4.3% increase.

Retail sales grew at a slower-than-expected pace of 2.7%, while fixed-asset investment gained 5.7% in the first seven months of the year, also worse than the 6.2% projected by economists. The surveyed jobless rate fell to 5.4% from 5.5%.

The nation's commitment to Covid Zero has made it tough to sustain any hard-won economic progress, as the threat of repeated restrictions and re-openings continues to loom. While cases were low in Shanghai and surrounding provinces last month, numbers went up in places including the eastern province of Anhui, Xi'an, home to the famed Terracotta Warriors, and manufacturing hub Wuxi. 

August also saw a surge in cases in the resort island of Hainan, where authorities have locked down holidaymakers, suspended flights and shut businesses to contain infections.   

Independent high-frequency data suggest the economy's recovery is far from certain. Truck flows -- a proxy for economic output -- were significantly lower in July than at the same time last year, and home sales last month plunged from a year earlier. 

Beijing has been softening the tone around its full-year gross domestic product growth target of “around 5.5%,” with a top-level Politburo meeting in July concluding the country should achieve “the best outcome” possible for economic growth, rather than mentioning specific national economic goals.

Officials didn't announce any big stimulus at that meeting, instead emphasizing the better implementation of existing policies. The People's Bank of China also recently repeated a pledge to avoid massive stimulus and excessive money printing to spur growth. 

In a surprise move earlier Monday, China's central bank unexpectedly cut a key policy interest rate for the first time since January, lowering the rate on its one-year policy loans by 10 basis points to 2.75% on Monday. At the same time, it also withdrew liquidity from the banking system by only partially rolling over the 600 billion yuan of loans maturing this week.

China Central Bank Unexpectedly Cuts Key Rate to Spur Growth (1)

Without strong stimulus, a quick 2020-style rebound seems unlikely given the damage wrought by Covid, a worsening property downturn, increasing inflation pressure, slowing external demand and a grim employment environment.

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