The disappointing economic backdrop to China's policy dilemma

BY Reuters | ECONOMIC | 08/16/22 06:55 AM EDT

By Patturaja Murugaboopathy

(Reuters) - China's central bank cut its interest rates on Monday for the second time this year, but analysts suspect it will do little to spur lending in an economy awash with cash but lacking in consumer demand and business confidence.

The People's Bank of China (PBOC) lowered the rate on its one-year and 7-day lending facilities by 10 basis points after a string of data for July painted a gloomier economic picture than previously.

Housing prices fell. Property investment also sank and new construction was weak.

China's retail sales grew 2.7% in July, compared with 3.1% in June, pointing to slowing consumer spending.

Industrial production also missed expectations. Concerns over fresh COVID-19 flare-ups, worries about jobs and the crisis in the property sector have dented borrowing by companies and consumers.

Chinese banks extended 679 billion yuan ($101 billion) in new yuan loans in July, less than a quarter of June's amount, according to data released by the PBOC last week.

Most of China's recent monetary and fiscal stimulus has been flowing into savings. Chinese households added 10.3 trillion yuan in deposits in the first half of 2022.

According to Refinitiv Lipper, the total net assets of Chinese mutual funds has surged to a record $1.58 trillion at the end of June, 6.7% higher than at the start of the year.

(Graphic: Chinese money market mutual funds have the second biggest asset size - https://graphics.reuters.com/GLOBAL-MARKETS/gkplgoalmvb/chart.png )

In the stock market, outstanding margin loans have climbed to a four-month high of 1.64 trillion yuan, while equity mutual funds have attracted $7 billion in the last two months.

(Reporting by Patturaja Murugaboopathy; Additional Reporting by Gaurav Dogra in Bengaluru; Editing by Vidya Ranganathan and Edwina Gibbs)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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