China has recently unveiled economic indicators for July, shedding light on persistent downward pressures within its economy even as it continues to make strides in recovering from the three-year-long impact of the COVID-19 pandemic.
Despite the recovery trend, both domestic and international demand remain weak, prompting Chinese officials to reaffirm their commitment to bolster policy support. In a surprising move on Tuesday, the country’s central bank slashed key policy interest rates, signaling a proactive approach to stimulate economic growth.
Notably, July’s figures for industrial output, retail sales, and fixed-asset investments fell short of projections by certain foreign media outlets. However, Chinese analysts have pointed out that July and August typically experience a seasonal dip in economic activity. They anticipate that recent policy initiatives will gradually take effect, leading to a more pronounced resurgence in the latter part of the third or fourth quarter.
China’s National Bureau of Statistics (NBS) reported that value-added industrial output expanded by 3.7 percent year-on-year in July, a deceleration from the 4.4-percent growth observed in the preceding month. Retail sales registered a 2.5 percent year-on-year increase, down from the 3.1 percent growth in June. Additionally, fixed-asset investment grew 3.4 percent year-on-year during the first seven months of 2023, a slowdown compared to the 3.8-percent growth recorded in the first half of the year.
Fu Linghui, spokesperson for the NBS, acknowledged the progress made in the national economy during July but underscored the complex global political and economic landscape. He emphasized that domestic demand remains insufficient and called for further strengthening of the foundation for economic recovery.
While recognizing the challenges, Fu highlighted several positive aspects of the economy. The services sector, particularly lodging and eateries, experienced robust growth, with the service production index climbing by 5.7 percent year-on-year. Moreover, the output of solar cells surged by 65.1 percent year-on-year, while new-energy vehicle production increased by 24.9 percent year-on-year.
Zhou Maohua, an economist at Everbright Bank, noted that the lower-than-expected growth rates in various indicators for July point to a continued weakness in the domestic economy’s recovery. He attributed the central bank’s unexpected rate cut to address this situation.
In an effort to invigorate economic activities, the People’s Bank of China (PBC) reduced key policy interest rates. The move included a 15-basis-point cut to the one-year loan rate (medium-term lending facility or MLF), bringing it to 2.5 percent. The PBC also lowered the seven-day reverse repurchase rate, a short-term policy rate, by 10 basis points to 1.8 percent. Analysts praised this dual rate cut as a demonstration of China’s commitment to ensuring stable growth amidst ongoing challenges.
This action by the PBC has raised expectations for broader monetary policy support, including potential interest rate reductions and adjustments to the reserve requirement ratio, in the latter half of 2023.
China, which set a GDP growth target of around 5 percent for 2023, registered a 5.5 percent year-on-year growth in the first half of the year. To achieve its annual target, the nation needs a growth rate of 4.5 percent in the second half. Some institutions, including the IMF, anticipate even higher growth rates for China.
Fu reiterated the robustness of China’s economy, dismissing claims of deflation. He highlighted the nation’s extensive domestic market potential, strong industrial foundation, and other advantages as enduring strengths that will contribute to a continued recovery and improvement in the economy.