China's 'zero tolerance' takes its toll: Watch out for the 'domino effect'

  • Investing.com
  • Economy News
China's 'zero tolerance' takes its toll: Watch out for the 'domino effect'
Credit: © Reuters.

By Laura Sanchez

Investing.com - The People's Bank of China (PBOC) has cut its benchmark lending rate -10 basis points to 2.85%. "This is the first cut in its medium-term benchmark rate since April 2020, but the second consecutive cut if we take into account the reduction in its long-term rate last month (-5bp)," they highlight at Bankinter.

"We see this as another desperate move to improve financing conditions in certain sectors (e.g. real estate) and avoid a stream of defaults," the analysts say.

"On the GDP side, although the data are better than expected, the Chinese economy is slowing down for the fourth consecutive quarter. Consumption is one of its most affected components. In our view, China is beginning to reflect the collateral problems of its government's irrational interventionism, as well as an overheating of its real estate sector, which could drag down other sectors and even part of the population invested (with loans) in it", emphasise Bankinter, adding: "Our recommendation on China is still to sell".

Renta 4 (MC: RTA4 ) (MC:RTA4) agrees on the interpretation of the data. "Although in 2021 as a whole the Chinese economy will grow by 8.1%, well above the government's target of more than 6%, December's data show a significant slowdown in private consumption ( retail sales +1.7% 'vs' +3.8% estimated and +3.9% previously) compared to industrial production with a better performance (+4.3% 'vs' +3.7% estimated and +3.8% previously)".

Link Securities also believes that "the People's Bank of China has surprisingly lowered two of its most important official interest rates, following the publication in the country of a battery of macroeconomic figures that, although most of them have been somewhat above analysts' expectations, have confirmed that the growth of the Chinese economy has slowed significantly in the last months of the 2021 financial year".

"Moreover, it is very likely that this slowdown will be even more pronounced at the beginning of 2022 given the Chinese government's 'zero tolerance' policy on Covid-19, which is leading the Chinese authorities to confine entire cities," the experts add.

At this point, Link Securities warns that "this policy does not affect China alone, but may have significant negative repercussions on the global economy by causing supply chain problems to escalate, which may also delay the "long-anticipated" moderation of inflation".

"We do not believe that neither the rate cuts nor the PBOC's liquidity injections, which are otherwise very welcome, can counteract, at least in the short term, the inflationary effect of the restrictions implemented to try to prevent the spread of Covid-19 across the country. The evolution of the pandemic in China will therefore have to be closely monitored for its potential negative impact on global economic growth and on the results of many listed companies", the analysts conclude.

 

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