China Faces Deepening Economic Downturn Shadow... Central Bank Responds with Interest Rate Cuts

May Production, Consumption, and Employment All Sluggish
People's Bank Weighs LPR Cut on 20th

As China's economic recovery following the declaration of With-Corona at the end of last year delays, concerns about an economic downturn are growing. Before the release of various weak indicators such as production, consumption, and unemployment rate in May, the central bank hastily responded by lowering the policy interest rate.

On the 15th, the National Bureau of Statistics of China announced that industrial production in May increased by 3.5% compared to the same period last year. This figure not only worsened compared to the previous month’s figure (5.6%) but also fell short of experts' forecast (3.8%). China's industrial production measures the total output of factories, mines, and public facilities, reflecting manufacturing trends and serving as a leading indicator for employment and average income.

[Image source=Reuters Yonhap News]

It is not only the production indicators that are sluggish. Retail sales in China for May, announced on the same day, amounted to 3.7803 trillion yuan (approximately 676 trillion won), increasing by only 12.7% year-on-year, falling short of the previous month’s figure (18.4%) and the forecast (13.7%). Urban fixed asset investment increased by 4.0% year-on-year on a cumulative basis through May, below the cumulative figure through April (4.7%) and the forecast (4.4%). Fixed asset investment is an indicator showing changes in capital investment in factories, roads, power grids, real estate, excluding rural areas.

The unemployment rate remained flat at 5.2% for the third consecutive month following March and April. In particular, the youth (ages 16-24) unemployment rate, considered a key economic risk factor in China, reached 20.8%, setting a new record high following the previous month’s 20.4%.

The People’s Bank of China responded to concerns about an economic downturn by lowering interest rates, showing a clear monetary easing stance. On the morning of the 15th, ahead of the release of various indicators, the People’s Bank of China cut the Medium-term Lending Facility (MLF) rate, the policy interest rate, from 2.75% to 2.65%, a 0.1 percentage point reduction. This is the first time in 10 months that the central bank has lowered the policy rate.

Earlier on the 13th, the People’s Bank of China also lowered the 7-day reverse repurchase (reverse repo) rate from 2.00% to 1.90%, a 0.1 percentage point cut. The market expects additional measures such as further MLF rate cuts to come soon. There is growing anticipation that the Loan Prime Rate (LPR), which corresponds to the benchmark interest rate, will be lowered on the 20th.

This content was produced with the assistance of AI translation services.