China’s uneven recovery threatens Xi cleansing

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People look at images showing Chinese President Xi Jinping at the Chinese Communist Party Museum which opened ahead of the 100th anniversary of the Party’s founding in Beijing, China on June 25, 2021. REUTERS / Thomas Peter

HONG KONG, July 15 (Reuters Breakingviews) – The window is closing on President Xi Jinping’s cleanup campaign. The Chinese economy grew at a rate of 7.9% slower than expected in the second quarter compared to the previous year, as small businesses continue to struggle. Easing monetary policy is a potential quick fix to the markedly uneven recovery, but it will fuel lending to the sectors it is aggressively trying to contain. The pressure rises to restart the box.

The overall GDP figure narrowly missed a Reuters forecast. Scorching commodity prices are crushing corporate profit margins. Small and medium-sized businesses have underperformed in recent factory surveys, fearing exports could start to weaken. Despite this, the government’s emphasis on supporting businesses, and not ordinary consumers, creates mixed consumption patterns. The overall 12% growth figure in June is decent, but Pinpoint Asset Management economist Zhang Zhiwei, for example, found that four provincial cities suffered a rare contraction in retail sales in May.

Beijing is clearly worried but does not get out of the situation. The official heightened review of local government debt saw new special bonds, largely for infrastructure projects, in the first six months of the year to less than half of 2.2 trillion yuan ($ 340 billion) over the same period of 2020. While more is expected for the remainder of the year, it is unclear how much will go to provide a lift.

The People’s Bank of China has played a key role in supporting Xi’s efforts to control sectors that pose growing financial risks, such as real estate. It kept interest rates stable for more than a year, and as a result, the stock of shadow bank assets fell in the first quarter due to tighter regulations, according to Moody’s. But the dilemma between uneven growth and long-term risk helps explain Friday’s surprise reduction in the amount of liquidity most banks are required to hold in reserve for the first time in more than a year.

Property sales and prices remain attractive to investors, and the unraveling of debt problems among development giants like Evergrande is just beginning. The economy is generally expected to lose even more momentum over the remainder of the year and this inequality could strain China’s hand. The disruption of Xi’s deleveraging effort is reminiscent of how an economic slowdown forced a pause in 2018.

To pursue @ ywchen1 on Twitter

NEWS CONTEXT

– China’s economy grew 7.9% in the second quarter from a year earlier, slower than the 8.1% predicted by a Reuters poll, official data showed on July 15.

– The central bank of China announced on July 9 that it would reduce the amount of liquidity banks must hold as reserves, freeing up about 1,000 billion yuan ($ 154.5 billion) in long-term liquidity.

– The country’s dollar exports exceeded expectations, increasing 32.2% in June from a year earlier, compared to 27.9% in May.

– Inflation at the exits of factories in China slowed down slightly to reach a still high level of 8.8% in June after a government crackdown on commodity prices. Core consumer inflation, which excludes volatile food and energy prices, stood at 0.9% in June, unchanged from May. China will take “comprehensive measures” to ease rising commodity prices, Premier Li Keqiang said on a government website on July 13.

Editing by Una Galani and Katrina Hamlin

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