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

Oil prices tumbled Monday after China’s central bank unexpectedly cut rates after data showed economic activity slowed broadly in July, including consumer spending and factory output, reigniting concerns of a global downturn.

Signs of further cooling in the world’s second-largest economy, already under strain from China’s zero-covid policy and a real estate crisis, alarmed energy markets. The prospect of lower demand sent oil prices sliding 3.2 percent — pushing West Texas Intermediate crude to $89 a barrel.

The July data signaled that the post-lockdown recovery is fizzling amid an array of economic challenges, including the enduring threat of the coronavirus pandemic. Similar to the conflicting priorities that central bankers from other nations are facing, Chinese officials are eyeing rising debt and inflation. But a sputtering domestic economy appeared to take priority.

“The [People’s Bank of China] seems to have decided it now has a more pressing problem: the latest data show lacklustre economic momentum in July and a slowdown in credit growth, which has been less responsive to policy easing than during previous economic downturns,” said Julian Evans-Pritchard, an economist who covers China for the economic research firm Capital Economics.

China’s move to stimulate the economy through monetary policy threw Wall Street into a sour mood before recovering during afternoon trading. The Dow Jones industrial average gained 187 points or 0.6 percent. The broader S&P 500 index rose 16 points or 0.4 percent, while the tech-heavy Nasdaq increased 60 points or 0.5 percent.

The People’s Bank of China cut its medium-term lending rate to 2.75 percent, or 10 basis points, the first reduction since January. The move arrived as fresh data showed a slowing national economy, as policies designed to contain Covid-19 infections and a real estate crisis stalled growth.

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

For months some homebuyers in China have refused to pay the mortgage on properties they’ve bought but that developers have yet to finish building. The mortgage protests are tied to more than 100 delayed projects, leading to sinking home prices and frustrated home buyers. The boycotts have have raised concerns that the property market in China could collapse, undermining the country’s financial system and dealing a blow to the 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 an unravelling crisis could unleash.

The economic slowdown, a setback for Beijing, is another reminder of the painful economic impacts of attempting to end coronavirus infections. Last year, China more than regained its pre-pandemic economic activity, leading major economies in the recovery from the public health crisis, despite limitations on travel, U.S. sanctions 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 restrictions, while designed to prevent sickness, are taking a toll on the nation’s economy.

Figures for both retail sales and industrial production grew in July, compared to the same time last year, rising 2.7 percent and 3.8 percent respectively. But the economic indicators missed market expectations of 5 percent and 4.6 percent growth, and both metrics slowed compared to the increases in June, according to the National Bureau of Statistics.

“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,” said Evans-Pritchard, in a research note Monday.

China’s latest bout of worrying economic data highlights the global inter-dependance of financial markets and the importance of the Chinese economy for the U.S. and the world. Concerns of a global downturn have already taken hold as the aftershocks of the Russian invasion of Ukraine continue to reverberate throughout global commodity markets, sending prices skyward for oil, wheat and fertilizer.

Beijing’s’ worrying economic outlook also underlines the uneven nature of the covid-era recovery. In recent days, following the release of an upbeat inflation report in the U.S. and new unemployment data indicating that employers added a stunning 528,000 jobs, fears of an American recession have subsided.

But even as key indicators show an an economy that has stood back up after being pummeled from the pandemic, the ongoing geopolitical conflict in Ukraine continues to wreak havoc on the economies of poorer countries. And signs of a looming global recession can be found elsewhere. The European Union, in a bid to tamp down inflation, recently raised interest rates, putting an end to an era of easy money that has for years driven robust economic growth.