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China recession: PBOC efforts to stimulate growth may prove fruitless in preventing economic slowdown

By Fitri Wulandari

Edited by Alexandra Pankratyeva

10:45, 26 August 2022

Chinese crisis market concept
Will PBOC interest rate cuts prevent the economic slowdown? – Photo: Lightman4289 / Shutterstock

China reported weaker-than-expected economic growth in the second quarter of 2022. The world’s second-largest economy grew 0.4% in the three months to the end of June as strict Covid-19 restrictions took a toll on economic activity amid the global economic slowdown. 

Is China in recession now? In this article, we examine the country’s historical economic growth, China’s interest rates and the latest news to see whether the economy is entering a recession.

China recession history

A recession is when a country’s gross domestic product (GDP) declines significantly for two consecutive quarters. 

According to the International Monetary Fund (IMF), each recession has unique features, but there are several common characteristics, including: 

• A recession usually lasts about a year and results in significant output costs.

• It is characterised by a 2% drop in GDP. In severe recessions, the output cost is nearly 5%.

Based on data compiled by MacroTrends, China had a severe decline of more than 5% in its annual GDP growth rate in 1966-1967, 1971, 1974, 1976 and 1989, which could be seen as China's economic recessions. 

The country experienced a more than 2% drop in its annual GDP growth rate in 1972, 1979, 1981, 1986, 1995 and 2008. The most recent instance was in 2020 at the onset of the coronavirus pandemic.

China GDP growth rate 1961-2022

In 2020, China’s economic growth slowed to 2.3% from 6% in 2019 as the country’s strict restrictions to curb the spread of Covid-19 hit economic activity. In the first quarter of 2020, China’s economy declined by 6.8% year-over-year (YoY).

The surveyed urban unemployment rate stood at 5.2% at the end of 2020, while the registered urban unemployment rate was 4.2%, according to the National Bureau of Statistics of China. 

The total value of imports and exports of goods in 2020 increased by 1.9% from the previous year. However, the total value of imports and exports of services in 2020 dropped by 15.7% over the previous year. 

Other sectors, including investment and retail sales, posted growth despite the restrictions in 2020.

China’s GDP growth rate rebounded strongly the following year, growing at 8.1% in 2021 as the economy emerged from Covid-19 lockdowns, exceeding the Chinese government’s target of 6%.

Retail sales jumped 12.5% year-over-year (YoY). Fixed asset investment’s growth was steady at 4.9%. The unemployment rate was stable at 5.1% – below the government’s 5.5% target.

What is the People's Bank of China? 

The People's Bank of China (PBOC) is China's central bank. It was founded on 1 December 1948 as a result of the merger of the Huabei Bank, the Beihai Bank and the Xibei Farmer Bank. The State Council decided to make the PBC a central bank in September 1983.

The People's Bank of China Law, passed on 18 March 1995, confirmed the PBOC's central bank status.

The PBOC is in charge of setting China’s interest rates, issuing the Chinese yuan and overseeing financial markets.

According to the International Monetary Fund (IMF), the PBOC has four main instruments to conduct its monetary policy: the required reserve ratio for banks (RRR), bank deposits and lending rates, the medium-term lending facility rate (MLF), and the seven-day reverse repo rate.

The PBOC implemented the loan prime rate (LPR) system in 2019, requiring all loans to reference LPR, effectively making it the benchmark lending rate for Chinese banks. Because the LPR was linked to the MLF rate, this policy reform increased its significance.

While the PBOC is responsible for setting interest rates, it has a limited role in overall macroeconomic policy-making, according to the IMF. The State Council is the decision-making body. Decisions on key monetary policy matters are collective and often taken in the context of larger policy decisions. 

The PBOC's monetary policy committee acts as a consultative body. It meets quarterly but does not announce the dates in advance. It typically  issues a press release a few days after meetings.

PBOC's interest rates policy 

Data on the PBOC interest rate history compiled by Trading Economics and Countryeconomy shows that the bank kept its benchmark one-year LPR steady at about 4.35% throughout 2018 and mid-2019. 


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In the second half of 2019, the PBOC had three rate cuts that lowered China's key interest rate to 4.15% by end of 2019, from 4.25% on 20 August, according to PBOC data

In 2020, the PBOC continued its rate cuts amid the spread of Covid-19, PBOC historical rates data shows. The central bank cut the LPR to 4.05% in February and to 3.85% in April. 

It maintained the rate at 3.85% until December 2021 when it cut LPR by 5 basis points (bp) to 3.8%. In the second half of 2021, the PBOC adjusted its monetary policy to assist Chinese corporations affected by a deleveraging drive and Covid-19 restrictions.

The PBOC decided to lower the Required Reserve Ratio (RRR) by 50 basis points in July 2021 to 8.9%, reducing the reserves required of banks and increasing liquidity in China's financial system.

In December 2021, the central bank implemented its second 50 basis point RRR cut of the year to 8.4%, releasing approximately CNY1.2 trillion ($174.79bn) from bank reserves into the financial system.

Covid-19 outbreaks in early 2022 forced the PBOC to continue its rate cut policy in 2022. It lowered the LPR to 3.7% in January, cutting it for the second time to 3.65% on 22 August. 

In April, the PBOC also made a third RRR cut by 25bp to 8.1%. n January, China’s one-year MLF rate and seven-day reverse repo rate were cut by 10 bps to 2.85% and 2.95%, respectively.

On 15 August 2022, sluggish economic growth data amid renewed Covid-19 outbreaks forced the PBOC to cut rates for the second time in the year. The one-year MLF rate was cut by 10 bps to 2.75%.

Will PBOC’s efforts help to prevent China’s recession in 2022?
China interest rates history

China’s economic performance in 2022

The country’s economy slowed sharply to 0.4% in the second quarter of 2022, compared to 4.8% in the first quarter, as the government reimposed strict restrictions to control renewed Covid-19 outbreaks.

In other China recession news, according to TradingEconomics, second quarter GDP growth was the softest pace of expansion since a contraction in Q1 2020, when the initial coronavirus outbreak emerged in Wuhan. 

China’s GDP growth in the second quarter was also below analysts’ expectations. Bank of America (BofA), for example, had expected China to grow by 1.% in the second quarter, while the market consensus predicted a 1.2% growth.

The economy grew 2.5% in the first six months of this year, after expanding by 8.1% in 2021.

“Despite the improvement in June activity data, we do not think the growth headwinds have dissipated. The recent COVID flare-ups across the country will likely put 2H consumption recovery to the test. With deteriorated home sales in July and emerging risks from the mortgage payment strike, we think the property market turmoil will likely remain a drag on growth in the coming quarters,” BofA analysts wrote on 15 July.

China recession: Analysts forecast

With slowing economic growth reading in the second quarter, is China in recession now?

Concerns about China’s economic recession are growing after the IMF lowered its forecast for China’s GDP growth rate by 1.1%, down from April’s forecast to 3.3% in July. The IMF forecast China’s GDP growth to recover to 4.6% in 2023. 

“Upside risks to growth include announcements of material fiscal support and a recalibration of the authorities’ zero COVID strategy to reduce growth trade-offs, building on their successful campaign to ramp up the rollout of booster shots. Downside risks include larger-scale outbreaks of more contagious virus variants that trigger further widespread lockdowns under the zero-COVID strategy,” the IMF said in its July World Economic Outlook.
“A sustained slowdown in China would have strong global spillovers, whose nature will depend on the balance of both supply and demand factors.”

In May, Fitch Ratings cut its forecast for China’s 2022 GDP growth to 4.3%, down from 4.8%. However, it revised up its 2023 China’s growth forecast to 5.2%, from 5.1% on the assumption that the government will gradually phase out its ‘dynamic zero-Covid’ over the next year.

On July 15, ANZ Research downgraded China’s annual GDP forecast to 4% from 5%, while keeping the 2023 GDP forecast unchanged at 4.2%.

“More importantly, we see new downside risks. Domestic activity has been suppressed by frequent COVID testing and restrictions. Property demand could also falter as home buyers have begun to stop mortgage payments,” the bank said. 

Another downside risk is the youth jobless rate, which hit a record 19.3% in June, it added. 

At the time of writing (24 August), Trading Economics expected China’s economy to grow by 3.5% by the end of this quarter and 5.4% in 2023. 

According to its China interest rate forecast, the interest rate in China was expected to be 3.60% by the end of this quarter. In the long term, the China interest rate was projected to trend around 3.75% in 2023.

The bottom line

All forecasts in this article suggested that China’s economic growth could slow this year despite the PBOC’s two rate cuts. Keep in mind that analysts' predictions can be wrong. Before trading, you should always conduct your own research. Past performance does not guarantee future results. And never trade money that you can't afford to lose.


Is China in a recession?

China’s economy weakened more than expected in the second half of 2022 at 0.4%, slowing sharply from 4.8% in the first quarter. To see whether China is in a recession will have to wait for GDP numbers in the third and fourth quarter.

When was China's last recession?

The last time China’s economy registered a slump was in 2020 during the Covid-19 pandemic when its annual GDP growth slowed to 2.3% from 6% in 2019.

Why does China's interest rate drop?

China’s central bank has been aggressively cutting its key interest rates to stimulate growth. The PBOC’s key LPR is currently at 3.65%, down from an average of 4.35% between 2018 to mid-2019, according to Trading Economics data.

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