China tries to boost the economy by reducing interest rates

Why is it important to know what happens to the Chinese economy?

China is the second largest economy in the world – and is expected to become the largest in the coming decades – and any movement that occurs in the Asian giant has repercussions in other countries. A China with a stronger economy means, among many other things, that it will consume more raw materials and food, boosting the exports of several countries, including Brazil. Already a declining Chinese economy could have a negative impact on global economic production.

What is the reason for reducing interest rates?

Chinese economic indicators are weak compared to the patterns of strong economic activity of recent decades. By reducing interest rates, the central bank tries to stimulate economic activity, as the cost of loans and financing should fall.

The world economy saw a recovery in business activity thanks to the end of some health restrictions in June, but lost strength due to Beijing's insistence on maintaining the zero covid policy, which includes confinements and prolonged quarantines.

In July, Chinese industrial production rose 3,8% at an annual pace, below the 3,9% result in June, reported the National Statistics Office (ONE).

Retail trade grew 2,7% at an annual pace, against 3,1% in June, while urban unemployment fell to 5,4%, according to ONE.

“The risk of stagflation in the global economy is growing and the basis for a domestic economic recovery is not yet solid,” warned ONE in a statement.

Retail sales were possibly stagnant “due to some disruptions caused by the virus and the impact on consumers from the housing market issues,” said Julian Evans-Pritchard, China economist at Capital Economics.

“July’s economic data is very alarming,” he declared to Bloomberg channel economist Raymond Yeung, from Australia & New Zealand Banking Group Ltd.

He added that “the zero covid policy continues to affect the services sector and family consumption”.

The Chinese real estate sector is in crisis, with frustrated buyers in dozens of cities participating in mortgage boycotts, while companies with liquidity problems struggle to complete their projects.

China's economic growth was just 0,4% in the second quarter, the lowest since the start of the Covid-19 pandemic.

Curto Curatorship

• Understand why China is increasingly important for the Brazilian economy (CNN)
• Interest rate: what is it and how does it impact your investments? (Infomoney)

(with AFP)