Data has shown a continued slump in the Chinese economy which expanded at an annual pace of only 0.8% in the second quarter of 2022. While the rest of the world has been raising interest rates, China has surprised the markets with a rate cut.

The announcement came after a flurry of soft data points from China. The country’s retail sales increased only 2.7% YoY in July which was almost half of what analysts were expecting. The country’s retail sales had plummeted in April and May amid the COVID-19 lockdowns.

The slump in China’s retail sales is also reflected in Alibaba’s earnings. It reported revenues of $30.7 billion in the June quarter. While the metric was ahead of what analysts were expecting, it was slightly below the last year. This is the first time since Alibaba went public that it has posted a YoY fall in revenues.

Alibaba and other Chinese stocks fell on Friday after three Chinese companies decided to delist from the US markets. Markets fear more delistings of US-listed Chinese companies amid growing US-China tensions.

Along with the lower-than-expected retail sales, other data points also disappointed markets. The country’s industrial production rose 3.8% in July which was below the 4.6% that analysts were expecting.

Amid the strict lockdowns earlier this year, China’s industrial production took a hit. China’s automotive production was also impacted and companies like Tesla, NIO, and Xpeng Motors saw a fall in production. While NIO’s deliveries reached a record high in June aided by the lifting of lockdowns, they fell on a monthly basis in July.

Wall Street analysts are however overwhelmingly bullish on the company given its strong brand and backing from China. In June, Morgan Stanley analyst Tim Hsiao advised buying NIO stock and called it a “tactical idea.”

China Reports Soft Data, Raising Slowdown Fears

Investment in real estate in China also fell in July. The country’s real estate sector has been facing troubles. Many developers have not been able to develop the homes in the stipulated time. This has prompted many buyers to stop their mortgage payments.

If more mortgage borrowers boycott payments, analysts believe it would negatively impact the country’s banking sector. Fu Linghui, spokesperson of the National Bureau of Statistics acknowledged the slowdown in China’s property market.

He said, “This year, the property market overall has shown a downward trend,” Linghui added, “Real estate investment has declined, and may have had some impact on related consumption.”

Notably, China has so far refrained from announcing a big bang stimulus. The country’s debt to GDP ratio is approaching 300%, making it the world’s second most leveraged economy.

China officially has a GDP growth target of 5.5% for 2022. The economy expanded by 4.8% in the first quarter and 0.8% in the second quarter, taking the first half GDP growth to 2.5% The July data points show that the economy is not yet out of trouble and China would find it hard to achieve the target.

Data showed that Unemployment among Chinese youth between 16-24 years also rose to 19.9% in July even as the overall unemployment rate cooled to 5.4%.

China Announces a Rate Cut While Other Countries Are Raising Rates

China lowered rates by 10 basis points and pumped over $59 billion into the economy. The approach is in stark contrast to the rest of the world. In the US, the Federal Reserve has raised rates by 225 basis points so far to tame the multi-decade high inflation, which is partially being fuelled by the steep rise in gas prices.

US inflation rate fell to 8.5% in July. The fall is a welcome break for markets as the country’s inflation had surpassed 9% in June. The Fed targets average consumer inflation of 2%.

Coming back to China’s rate cut, Xing Zhaopeng, senior China strategist at ANZ was “surprised” at the move. He added, “The government remains cautious about growth and will not let go.”

Markets Are Surprised by China’s Rate Cut

Ken Cheung, chief Asian FX strategist at Mizuho Bank said, “Despite the warning of inflation risk and flush liquidity condition, the dominating downside risks under the COVID spread and property-sector rout prompted the PBOC to cut rates to stimulate demand.”

China has a controversial zero-COVID policy and locks down the entire city to control the spread of the coronavirus. There were sporadic protests against the forced lockdowns, something we don’t often hear in China.

Nonetheless, the growth slowdown is not limited to China and even the US economy contracted in the first half of 2022. That said, the deepening slowdown in China is not good news for US companies like Apple and Nike that count the country as among their major markets.

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