China's retail, factory sectors unexpectedly slow in July

Highlights:

• All indicators slowed from June, missed forecasts
• Youth unemployment hit record high in July
• Home price decline deepens
• PBOC cuts key rates to revive credit demand

China's economy unexpectedly slowed in July, with activity indicators from industrial output to retail sales missing forecasts by large margins, pointing to a shaky recovery as Beijing shows no sign of easing its zero-Covid policy.

Industrial output grew 3.8% in July from a year earlier, after expanding 3.9% in June, data from the National Bureau of Statistics (NBS) showed on Monday. That compared with a 4.6% increase expected by analysts in a Reuters poll.

Retail sales, which only turned positive in June, rose 2.7% from a year ago, greatly missing analysts' forecast for 5.0% growth. That compared with a 3.1% growth in June.

The world's second-biggest economy narrowly escaped a contraction in the June quarter, hobbled by the lockdown of the commercial hub of Shanghai, a deepening downturn in the property market and persistently soft consumer spending.

However, risks to growth abound as many Chinese cities, including manufacturing hubs and popular tourist spots, imposed lockdown measures in July after fresh outbreaks of the more transmissible Omicron variant were found.

Chinese policymakers are trying balance shoring up a fragile economic recovery and eradicating emerging Covid clusters with the economy expected to miss its official growth target this year - set at around 5.5% - for the first time since 2015.

Fixed asset investment, which Beijing had hoped would drive growth in the second half as exports soften, grew 5.7% in the first seven months of the year from the same period a year earlier, versus a forecast 6.2% rise and down from a 6.1% jump in January-June.

The employment situation remained fragile. The nationwide survey-based jobless rate eased slightly to 5.4% in July from 5.5% in June, although youth unemployment stayed stubbornly high, reaching a record 19.9% in July.

In order to prop up growth, the central bank on Monday unexpectedly lowered interest rates on key lending facilities for the second time this year. New yuan loans tumbled by more than expected in July as companies and consumers stayed wary of taking on debt, data showed on Friday. 

Official data also showed on Monday that new home prices fell 0.9% in July from a year ago, the fastest pace since September 2015, as the property market, which has been further rocked by a mortgage boycott, showed no signs of improving.

Economists and analysts said they believe Chinese authorities are keen to support the sluggish economy by allowing a widening policy divergence with other major economies that are raising interest rates aggressively.

The People's Bank of China (PBOC) said it was lowering the rate on 400 billion yuan ($59.33 billion) of one-year medium-term lending facility (MLF) loans to some financial institutions by 10 basis points (bps) to 2.75%, from 2.85%.

In a poll of 32 market watchers last week, all respondents had forecast the MLF rate would be left unchanged and 29 had predicted there would be a partial rollover. 

"The rate cut surprises us," said Xing Zhaopeng, senior China strategist at ANZ.

"It should be a response to the weak credit data on Friday. The government remains cautious about growth and will not let go."

New bank lending in China tumbled more than expected in July while broad credit growth slowed, as fresh Covid flare-ups, worries about jobs and a deepening property crisis made companies and consumers wary of taking on more debt.

The PBOC attributed its move to "keep banking system liquidity reasonably ample". And with 600 billion yuan worth of MLF loans maturing, the operation resulted a net 200 billion yuan of fund withdrawal.

Market participants have largely priced in the partial rollover as the banking system was already flush with cash, with interbank money rates hovering at two-year lows and persistently below policy rates.

"Now with hindsight, today's 10-bp cut may be seen as 'front-loading' before the policy room gets narrower going forward as the PBOC sees structural inflation pressure," said Frances Cheung, rates strategist at OCBC Bank.

The PBOC reiterated it would step up the implementation of its prudent monetary policy and keep liquidity reasonably ample, while closely monitoring domestic and external inflation changes, it said in its second-quarter monetary policy report. 

"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," said Ken Cheung, chief Asian FX strategist at Mizuho Bank.

China's 10-year treasury futures CFTU2 jumped more than 0.7% in early trade following the rate decision, while yields on sovereign bond for the same tenor CN10YT=RR fell about 5 basis points.

The central bank also injected 2 billion yuan through seven-day reverse repos CN7DRRP=PBOC while cutting the borrowing cost by the same margin of 10 bps to 2.0% from 2.1%, according to an online statement.

The PBOC lowered both rates by 10 bps in January.