China’s Central Bank Cut Key Policy Rate to Prop Growth After Disappointing Data
China Reopening
The Chinese economy was suppressed last year by the pandemic and the strict containment measures enforced by authorities, which closed down factories and whole neighborhoods for a handful of cases. However, the country pivoted away from these very restrictive measures in late-2022 and economic activity started to pick up.
After a disappointing growth of just 3% in 2022, the government targets a GDP of around 5% this year [1], while the World Bank upgraded its forecast last week, projecting a 5.6% expansion [2]. The first economic releases of the year underpinned the reopening, with GDP for instance, having grown by 4.5% y/y in the first quarter.
Recovery Fears
Despite the initially strong data points, last month's releases sparked fears over the recovery process and the most recent ones added to those concerns. Factory activity contracted further in May, as the manufacturing PMI dropped to 48.8%.
Consumer prices (CPI) ticked up to 0.2% y/y in the same month, but inflation remains almost non-existent, in a clear sign of weak consumer demand. Even worse, deflation deepened on the producer side, since PPI plunged 4.6% y/y, in the biggest decrease since 2001.
Investors will have another chance to gauge the strength of the recovery later this week, with the May retail sales and industrial production. The last figures had shown significant acceleration, but were far lower than what markets wanted.
Central Bank Action
The central bank of China (PBoC) has been trying help the economy growth and in March, it had lowered the Reserve Requirement Ratio (RRR) by 25 basis points, which permits banks to keep in reserves, a smaller portion of their cash. [3]
Today, the central bank took further action, by cutting a key short-term policy rate, for the first time since August. Officials lowered the seven-day reverse repurchase rate by 10 basis points, to 1.9%, injecting 2 billion yuan into the financial system. [4]
The move did not come as surprise, since the recent string of poor data has put pressure on authorities to support the economy. In a prelude to that move, large commercial banks had cut their deposits rates last week, according to Reuters [5]. Now focus shifts to the medium lending facility rate decision, due later this week.
Stock Market Reaction
The trajectory of the CHN50 index is telling of the hopes and fears around the progress of the world's second largest economy. It posted a strong rebound from November as the country started moving away from the stringent zero-Covid policies and made an impressive start to 2023.
After that however, pressures started to mount and erased the 2023 gains. It currently trades in negative territory for the year, below the 2022 close (black line), after April's losses due to the renewed jitters around the recovery. Today's action by the PBoC offered some support, albeit somewhat limited.
Nikos Tzabouras
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
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