Is China’s economy heading towards a slowdown?
Is China's economy heading towards a slowdown?

In the past few months, rising inflation and interest rate hikes have been buzzwords in markets across the globe. The rate hike decision taken by the US Federal Reserve and central banks in other developed economies to curb inflation is being closely monitored.

However, things seem to be different in the Chinese economy, following a surprise rate cut of 0.1% by the People’s Bank of China. But why is China taking monetary measures contrary to its global counterparts? Let’s take a closer look.

China’s central bank lowered its one-year policy rate to 2.75% and the seven-day reverse repo rate to 2% from 2.1% on Monday. The surprise rate cut was done to support the country’s economy, which has been impacted due to repeated Covid-led lockdowns and restrictions.

As a result of these restrictions, key economic indicators like retail sales and industrial output in July fell short of market expectations. Retail sales growth weakened to 2.7% YoY from 3.1% in June. Industrial production grew 3.8% YoY in July, but lower than June’s 3.9%. Meanwhile, property sales contracted by 29% deeper than the 18% fall in June. This was after the Chinese GDP growth slumped to 0.4% in the June quarter, as compared to 4.8% in the March quarter.

The disappointing numbers prompted the central bank to cut rates with the aim of stimulating demand. It’s worth noting that a slowdown in the Chinese economy affects the global economy. China is a major consumer of commodities, especially industrial metals and crude oil. Any decline in demand from China can trigger a fall in prices of commodities.

This is already visible in the prices of crude oil. Brent crude oil price is down by over 9% this month, mainly due to concern over demand in China, which is the world’s largest crude importer. Meanwhile, prices of key metals like copper and iron ore have also corrected due to weak Chinese demand.