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China’s surprise rate cut, economic slowdown send oil prices plunging

Oil prices fell 4.6 percent on the prospect of lower demand, pushing West Texas Intermediate crude to $88 a barrel

People walk at a shopping district in Beijing on Aug. 15. (Mark R. Cristino/EPA-EFE/Shutterstock)

China’s central bank unexpectedly slashed rates Monday after data showed economic activity slowed broadly in July — including consumer spending and factory output — sending oil prices down sharply and reigniting concerns of a global downturn.

The underwhelming performance signaled that the recovery is tapering off amid an array of economic challenges, including continuing fallout from the nation’s “zero covid” policy and real estate crisis. But the specter of falling demand from the world’s second-largest economy alarmed energy markets. Oil prices slid more than 4.6 percent, pushing West Texas Intermediate crude to $88 a barrel.

Much like the conflicting priorities that central bankers in other countries are facing, Chinese policymakers are closely tracking inflation and rising debt levels. But a sputtering domestic economy appeared to take priority, prompting the People’s Bank of China to cut its medium-term lending rate to 2.75 percent, or 10 basis points, for its first reduction since January.

The central bank “seems to have decided it now has a more pressing problem,” said Julian Evans-Pritchard, an economist who covers China for the economic research firm Capital Economics. The July data shows lackluster economic momentum and a slowdown in credit growth, “which has been less responsive to policy easing than during previous economic downturns.”

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Figures for both retail sales and industrial production grew last month compared with the same month last year, rising 2.7 percent and 3.8 percent, respectively. But they fell well short of forecasts of 5 percent and 4.6 percent growth, and both metrics slowed compared with increases recorded in June, according to the National Bureau of Statistics.

The developments threw Wall Street into a sour mood before stocks rallied. By the closing bell, the Dow Jones industrial average gained more than 151 points or 0.4 percent, to close at 33,912. The broader S&P 500 index rose 17 points, or 0.4 percent, to end at 4,297, while the tech-heavy Nasdaq increased nearly 81 points, or 0.6 percent, to settle just above 13,128.

China's central bank cut key lending rates in a surprise move on Aug. 15 to revive demand as data showed the economy unexpectedly slowing in July. (Video: Reuters)

“The momentum of economic recovery has slowed,” government spokesman Fu Linghui said during a news conference, the Associated Press reported. “More efforts are needed to consolidate the foundation of economic recovery.”

For months, a large contingent of Chinese home buyers have refused to pay mortgages on properties they’ve bought but that developers have yet to finish, leading to sinking real estate values. The boycotts, which are tied to more than 100 delayed projects, have raised concerns the property market could collapse, a scenario that would undermine the nation’s financial system and have ripple effects for the global economy.

For more than a decade, construction and real estate have helped fuel China’s astounding economic growth and bolstered an emerging middle class, underscoring the significance of the mortgage crisis and the damage the unraveling crisis could unleash.

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The economic slowdown is more fallout from Beijing’s efforts to contain coronavirus infections. Last year, China more than regained pre-pandemic economic activity, leading major economies in the recovery from the public health crisis, despite limitations on travel and the lower efficacy rates of the country’s coronavirus vaccines. But the rebound appears to have been short-lived.

Other nations that have pursued less stringent public health policies have largely reopened businesses, schools and government services. But Chinese leaders have not wavered from their zero-covid approach of stamping out every outbreak through stringent measures that include frequent and sudden lockdowns, rounds of mass testing and constant uncertainty for the people living there.

“The July data suggest that the post-lockdown recovery lost steam as the one-off boost from reopening fizzled out and mortgage boycotts triggered a renewed deterioration in the property sector,” Evans-Pritchard said in a research note Monday.

The worrying economic data highlights the interdependence of financial markets and the importance of the Chinese economy. Concerns of a global downturn have already taken hold as aftershocks from the Russian invasion of Ukraine continue to reverberate, sending prices skyward for oil, wheat and fertilizer.

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It also underlines the uneven nature of the covid-era recovery. In recent days, an upbeat inflation report in the United States and new unemployment data indicating that employers added a stunning 528,000 jobs last month were released.

The July jobs report capped a staggering 19 months worth of gains and brought the U.S. unemployment rate down to 3.5 percent — its lowest point since February 2020, tying for the lowest rate since 1969. The job market has more than recovered its pandemic losses and the momentum has afforded workers historic wage gains and more leverage at their jobs.

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Economists and White House officials had predicted a slowdown in job growth last month due to economic indicators that raised alarms. Inflation hit 40-year highs and the economy shrank over the past six months on the year, typically a benchmark for recessions. The financial markets have also lost trillions of dollars in value this year, and one measure of consumer sentiment hit a record low in June.

And signs of a looming global recession can be found elsewhere. On July 21, the European Union raised interest rates in a bid to tamp down inflation, putting an end to an era of easy money that has for years driven robust economic growth. Two weeks later, the Bank of England followed suit, raising its primary interest rate by half a percentage point — its largest increase since 1995 — and warned that Britain would enter a protracted recession before the end of the year.

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