In July, various economic indicators in China, including industrial output, consumer spending, and investment, fell short of expectationsThis suggests that domestic demand remains inadequate, and the foundational recovery of the economy still requires strengtheningThe People's Bank of China (PBOC) has implemented its second interest rate cut this year, signaling an ongoing commitment to bolster growthThe aim is for economic momentum to gradually stabilize by the end of the third quarter or the start of the fourth.

The economic recovery post-COVID-19 has been characterized by a bumpy trajectoryFollowing a surprising rebound in the first quarter, the economic momentum receded in April and May, leading to a gradual return to average performanceAccording to data released by the National Bureau of Statistics, the value-added industrial output in July grew 3.7% year-on-year, a decline of 0.7 percentage points from the previous month

Similarly, total retail sales in July increased 2.5%, down 0.6 percentage points from JuneFurthermore, from January to July, fixed asset investment, excluding rural households, rose 3.4% year-on-year, which is a slight reduction compared to the first half of the yearThe urban survey unemployment rate also saw an increase to 5.3% in July, representing a rise of 0.1 percentage points from June.

The statistics bureau acknowledged that while there is a sustained recovery and solid progress towards high-quality development, the global political and economic landscape remains complex, and domestic demand continues to appear insufficientThe extent of economic recovery requires reinforcement.

In terms of credit and social financing, July's figures were below predicted levelsThe central bank reported that new social financing amounted to 528.2 billion yuan in July, which was 270.3 billion yuan less than the same month last year

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New yuan loans totaled 345.9 billion yuan, falling short by 349.8 billion yuan compared to the prior yearThe year-on-year increase in the total social financing stock was 8.9%, a slight drop from the previous month, while the broad money supply (M2) increased by 10.7%, also down by 0.6 percentage points from June.

Considering the shaky foundation of economic recovery and the disappointing credit figures, the PBOC acted on August 15 by cutting interest rates for the second time this yearThe one-year Medium-Term Lending Facility (MLF) rate was reduced by 15 basis points, while the 7-day reverse repurchase rate was decreased by 10 basis pointsMarket analysts anticipate a simultaneous reduction in the Loan Prime Rate (LPR) and believe that further cuts in required reserve ratios and interest rates are quite possible.

Currently, the macroeconomic policy is gradually intensifying its effects

Following the central bank's recent interest rate cut, further supportive policies for economic stability are expected, with a steady recovery in the economy being viewed as only a matter of timeAt the end of July, a macroeconomic and financial market prediction conducted by the Securities Market Weekly indicated that institutions project a median GDP growth of 5.2% for China in 2023, suggesting a reasonable confidence in achieving the government's target of around 5% growth.

Wu Ge, chief economist at Changjiang Securities, suggested that if policies are more forcefully implemented in the third quarter, the economic growth rate may begin to stabilize by the end of the third quarter or early in the fourth.

However, the underlying recovery of the economy is still fragileJuly's economic indicators, both year-on-year and month-on-month, showed declines, highlighting the instability of the post-pandemic economic rebound.

Looking specifically at consumer behavior, the promotional campaigns in June created a spillover effect, potentially impacting July's consumer spending

Given that household incomes have not fully recovered, residents are prioritizing value-oriented purchases, which has consequently affected discretionary spending negativelyNonetheless, there were notable upticks in restaurant spending, summer tourism, and entertainment consumption, which could serve as a stabilizing force in the futureIn July, passenger transport volumes increased by 47% year-on-year, while restaurant revenues rose by 15.8%. Notably, the box office for movies saw a staggering 111% month-on-month growth, with ticket sales increasing by 100.7% in the same period.

On the investment front, weak performance in the real estate sector has contributed to underwhelming figuresBetween January and July, the sales area of residential properties shrank by 6.5%, an increase of 1.2 percentage points in the rate of decline compared to the first half of the year

Real estate investment dropped by 8.5% in the same period, widening by 0.6 percentage points over the same periodOngoing liquidity risks faced by certain real estate companies are worrying investors, and consumer behavior regarding housing is still cautious, depending heavily on forthcoming policy relaxations.

In terms of exports, July saw a year-on-year decrease of 14.5% in USD terms, which is a deceleration of 2.1 percentage points compared to June, marking the second consecutive month of declines exceeding 10%. Exports to major developed economies showed weakness, with growth rates of approximately -20% for the EU, the United States, and Japan, which have been significant drag factors on overall exports.

From a production standpoint, industrial output has also experienced notable declines both year-on-year and month-on-month in July

According to Caitong Securities, weak domestic demand combined with slowing external demand has led to a reluctance among businesses to expand productionAdditionally, adverse weather conditions—characterized by high temperatures and heavy rainfall—have disrupted manufacturing activities.

Yuekai Securities has noted that since 2022, the economy has significantly deviated from its potential growth trajectory, with the gap not effectively narrowingThis discrepancy has been directly affected by struggles in the real estate market and poor export performanceThe “scar effect” from the pandemic and the “negative wealth effect” from underperforming capital markets have dampened consumer demandMoreover, low confidence and expectations among entrepreneurs have led to decreased private investmentAlthough rapid recovery in consumer services and continuous government-led infrastructure investments have provided some cushioning against economic headwinds, they have not offset downward pressures fully

Thus, in addition to enhancing counter-cyclical regulation, various reform measures are also needed to stimulate microeconomic dynamism.

In July, newly added yuan loans stood at 345.9 billion yuan, decreasing by 349.8 billion yuan year-on-yearNotably, long-term loans to residents decreased by 67.2 billion yuan, representing a larger decline of 215.8 billion yuan compared to the previous year, while short-term loans decreased by 133.5 billion yuan, also indicative of diminishing consumer confidence.

Guosheng Securities observed that the negative growth in short-term loans signals persistent weakness in consumption, while the negative shift in long-term loans reflects continued pressure on the real estate sectorCorporate long-term loans saw an end to an 11-month streak of year-on-year increases

In the context of tightening credit conditions, the increase in bill financing reflects a trend toward short-term financing responses.

The lower-than-expected credit indicates that economic demands remain languid and reveals certain barriers in the transmission of credit easingSince 2022, average bank loan rates have been declining; however, interest rates for private financing in places like Wenzhou have not decreased, suggesting that the transmission of interest rate relief needs improvementKey factors inhibiting financial looseness include rising risk premiums and declining collateral values.

In response to the insufficient demand, the central bank has once again cut interest ratesOn August 15, a 401 billion yuan operation for one-year MLF was undertaken, reducing the interest rate by 15 basis points to 2.5%. This was coupled with a 204 billion yuan 7-day reverse repurchase operation where the bidding rate was lowered by 10 basis points to 1.8%.

This marked the PBOC's second interest rate cut in the year, following a mid-June adjustment; and this recent MLF rate reduction is the largest since April 2020, underscoring the central bank’s urgency to address demand challenges and signalling increased counter-cyclical adjustments to staunch support for the real economy

Typically, the LPR is formed based on the MLF and additional margin set by banks; hence, the decrease in MLF is expected to prompt a subsequent reduction in LPR rates swiftly.

Internally, there are still notable pressures on economic recoveryThe central bank's recent meeting reiterated the need for precise implementation of macro-control measures and emphasized enhanced counter-cyclical adjustments and policy reserves.

Externally, the nearing end of the Federal Reserve's tightening phase has created more room for China’s monetary policy maneuveringCitic Construction Investment Securities notes that historically, in the later stages of the Fed's interest rate hikes, US Treasury yields tend to stabilize and decline, providing more latitude for Chinese monetary policy operations during this period, which is crucial for prioritizing economic stability.

Looking ahead, Citic Construction Investment Securities anticipates a likely co-reduction of 15 basis points for both the one-year and five-year LPR