China Unexpectedly Cuts Key Rate, Adds Liquidity As Economic Growth Slowed, Retail Sales Slump

A busy night started with weakness in US equity futures (Nasdaq down 0.5%) and an unexpected cut in a key China policy rate and a modest addition of liquidity. This was then followed by a mixed bag of China macro with a GDP beat (but slowing growth) but ugly retail sales disappointment. All of which sent the Yuan lower…

As Bloomberg reports, China lowered a key interest rate for the first time since the peak of the pandemic in 2020 as a property-market slump and repeated virus outbreaks dampened the nation’s growth outlook. The People’s Bank of China cut the rate on its one-year policy loans by 10 basis points to 2.85%. That’s the first reduction since April 2020. It also slashed the rate on the seven-day reverse repurchase agreements by the same magnitude to 2.1%.

The central bank made the move while offering 700 billion yuan ($110 billion) via the medium-term lending facility, exceeding the 500 billion yuan coming due. It added 100 billion yuan with seven-day reverse repos.

“The PBOC has accelerated its pace of policy easing in order to guide borrowing costs lower and to encourage credit supply,” said Yewei Yang, an analyst at Guosheng Securities Co.

“The move suggests China’s economic is weak and it will trigger a significant slide in borrowing costs.”

The cut to policy rates indicates the PBOC is taking easier stance to deal with economic downward pressures which were reflected somewhat in a mixed set of data from China that showed growth slowing (albeit better than expected) and retail sales notably disappointing.

  • China 4Q GDP Grows 4% Y/Y; Est. 3.3%, but notably below Q3’s +4.9%

  • China Dec. Industrial Output Rises 4.3% Y/Y; Est. 3.7%

  • China Jan.-Dec. Fixed Investment Rises 4.9% Y/Y; Est. 4.8%

  • China Jan.-Dec. GDP Grows 8.1% Y/Y; Est. 8%

  • China End-Dec. Survey Jobless Rate Rises to 5.1% vs 5.0% Prior

  • China Dec. Retail Sales Rise 1.7% Y/Y; Est. 3.8%

As is clear in the chart below, all of the key macro measures worsened…

As Bloomberg’s Enda Curran notes, the retail sales weakness looks broad based. There was a big decline in sales of household electronics and automobiles and also contraction for restaurant/catering, clothing, jewelry and furniture. Given the news through January regarding the virus outbreaks, one wonders if that can turn around materially in the near term. The annual new years holiday would be an obvious boost in other years, but less clear how it plays out this year.

On a seasonally adjusted month/month basis, China’s retail sales rose in just four months last year. Even during 2020’s pandemic impacts, there were five months of such sales growth.

On top of the big miss for retail sales, online shopping shows more worrying signs for the country’s weakening consumer demand. Online retail sales grew 14.1% in 2021, the slowest annual pace since 2014.

Chang Shu and David Qu, economists at Bloomberg Economics, say the bigger-than-expected cut to the one-year MLF rate shows it’s serious about supporting the economy.

We give the final words to Peiqian Liu, an economist at NatWest Markets:

This is a decisive dovish tilt as the policymakers acknowledged the importance to stabilize short term growth.

The rate cut may translate into a broad-based 10bps lower in 1Y and 5Y LPR on Thursday.

In terms of our outlook for monetary policy in 2022, we think the PBOC will unlikely resort to “flood-style stimulus” of consecutive and aggressive rate cuts. Instead, we see room for moderate easing with another 20bps rate cut and 100bps RRR cut for the rest of this year.

US equity futures extended their losses despite the MLF rate cut…

The stock market reaction to the PBOC’s interest rate cut is relatively muted because “the latest cut seems to be in line with the targeted pro-growth policy guidance for 2022 as highlighted by the key economic working group,” says Kelvin Wong, analyst at CMC Markets

One last thing of note, China’s stats folks say the country’s population was about 500,000 people more at year’s end than a year earlier (albeit a rounding error), but it signals that China hasn’t gotten to peak population just yet apparently.

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