China Cuts Interest Rate as Growth Risks Worsen With Omicron

• GDP rose 4% y/y in fourth quarter, 8.1% for full year
• Retail sales weaker than forecast last month, investment slows

China’s central bank cut its key interest rate for the first time in almost two years, bolstering an economy that’s losing momentum in the face of repeated virus outbreaks.

The 10 basis-point reduction was announced shortly before data showed gross domestic product grew 4% in the final quarter of 2021 from a year earlier, higher than the 3.3% rise projected by economists but slower than in the previous three months.

Economic Slowdown

China’s growth slows, with retail sales weakening more than expected

Consumer spending took a notable dive in December as the government tightened virus controls in several parts of the country. An outbreak of omicron-variant virus cases in January, including in Beijing now, will further curb sentiment.

“Growth will continue to be weighed down by the property sector and of course the zero-Covid policy that China is going to continue with,” Sian Fenner, lead Asia economist at Oxford Economics, said in an interview on Bloomberg TV. “Retail sales numbers are still quite telling that the zero-Covid policy is still wearing on consumers, and we haven’t seen the recovery that we’ve been seeing in the industrial sector.”

The economy was battered by repeated shocks in the latter half of last year: electricity shortages, defaults from a slow-moving housing and property crisis, and repeated Covid-19 outbreaks. The central bank stepped up its support Monday by cutting policy interest rates and boosting liquidity.

For the full year, the world’s second-largest economy expanded 8.1%, well above the government’s target of “over 6%.” A surge in global trade helped, with data last week showing exports from China rose to a record $3.36 trillion in 2021.

Key data highlights

• Industrial output rose 4.3% y/y in December, versus the median forecast of 3.7%. For the full year, it went up 9.6%
• Retail sales increased 1.7% y/y in December from 3.9% in November and versus an estimate of 3.8%. Total sales rose 12.5% in the year
• Fixed-asset investment rose 4.9% y/y in 2021. Property investment was up 4.4%, infrastructure investment gained 0.4% and spending in the manufacturing sector climbed 13.5%
• The jobless rate rose to 5.1% at the end of December from 5% in the previous month
• The economy expanded 1.6% on a quarter-on-quarter basis in the final three months of the year, faster than a revised 0.7% in the previous three months

The outlook for 2022 is still unclear, with global demand forecast to slow, the omicron variant still spreading inside and outside the country, and no end in sight to the housing market crisis that began with China Evergrande Group. Goldman Sachs economists have already cut this year’s growth forecast for China to 4.3% due to the increased difficulty of containing the highly-contagious virus variant.

Beijing has made economic “stability” a priority this year ahead of a meeting in the fall where President Xi Jinping is expected to be confirmed as leader again, suggesting the government will take more stimulus steps to spur growth.

What Bloomberg Economics Says…

The People’s Bank of China’s bigger-than-expected cut to the one-year medium-term lending facility rate shows it’s serious about putting a prop under the economy. The move suggests banks will quote a lower one-year Loan Prime Rate at Thursday’s fixing for a second month in a row — providing more support for a slowing economy.

Chang Shu and David Qu

The interest rate cut by the People’s Bank of China Monday exceeded market expectations and puts it at odds with other major central banks like the Federal Reserve, which is preparing to hike interest rates. The one-year medium-term lending facility rate was lowered to 2.85% from 2.95% and the seven-day reverse repurchase rate was reduced to 2.1% from 2.2%.

The PBOC also injected more liquidity by offering 700 billion yuan ($110 billion) of MLF loans, exceeding the 500 billion yuan maturing, and added 100 billion yuan with seven-day reverse repos, more than the 10 billion due.

Rate Cut

China’s slowing economy prompts PBOC to act

Chinese stocks rose following the rate cuts, with the benchmark CSI 300 Index up as much as 0.9% after falling in the previous two days. The yield on 10-year sovereign bonds trimmed its drop to 1 basis point to 2.79% as of 11:23 a.m. local time, after falling 3 basis points in response to the rate reductions.

Industrial output accelerated in December, but will likely weaken this month because of several factors: the upcoming Lunar New Year break, disruptions from stringent virus containment measures in Xi’an, Tianjin, some cities in Zhejiang and elsewhere, and production curbs imposed on heavy industries in northern China to ensure blue skies for Beijing’s Winter Olympics.

Although authorities have moved to ease some of the restrictions on real-estate funding, the effect has yet to be reflected in the numbers. Growth in infrastructure investment was also slow to pick up despite the central government urging provincial and local governments to borrow and spend.

“The property sector’s drag on fixed asset investment is quite stark and shocking,” said Liu Peiqian, China economist at NatWest Group Plc. She estimates December property investment plunged by 13.9% from a year ago, widening from the 4.9% contraction in November.

Source: Bloomberg