China cuts rates: Winter Olympics fuel economic downturn

China’s zero-virus policy goes far beyond social distancing and wearing masks in crowded places. That means closed motorways and suspended flights, trains and bus services. China is taking tough action, in part to prevent the Winter Olympics being less than three weeks away. That means trading much-needed economic growth for international prestige.

China on Monday cut its policy rate for the first time in nearly two years, underscoring the grim economic backdrop. The 10 basis point cut in one-year lending rates bucks the region’s trend of faster growth.

It’s a signal that a housing downturn, power shortages and lockdowns are starting to hit growth harder than expected.China’s GDP rises 4% The last quarter was the slowest pace in 18 months compared to the same period last year.

A rate cut usually heralds more aggressive steps from Beijing. The government is expected to significantly increase infrastructure spending. It could also force banks to ease lending requirements for struggling companies. Real estate developers caught in the crossfire of the Evergrande crisis will benefit the most.

That creates a weaker outlook for banks, which are already battling growing non-performing loans. The mainland-listed shares of China’s two largest banks – Industrial and Commercial Bank of China and China Construction Bank – have fallen by a tenth over the past year, reflecting their growing burden.

On the other hand, a strong recovery in infrastructure spending should help companies such as Sany Heavy Industry, Jiangsu Hengli Hydraulics and Anhui Conch Cement recover fully. Their shares have fallen 30% over the past year as woes in the real estate sector weighed on sentiment.

Monday’s data release also highlighted a key economic weakness. Exports from China cannot be counted on to offset the weak consumption caused by the zero-virus policy. The strength of overseas sales did lift its global trade surplus to a record $676 billion last year. But exports will account for only one-fifth of GDP growth in 2021, while household consumption will account for two-thirds.

The Olympics are becoming an expensive sport for China.

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