Chinese Economy Update: Oil, Rates & Tech

The Chinese economy has been making the headlines in the past couple of days as economic data releases to Chinese tech companies have been causing volatility in the stock and commodity markets. So what exactly is going on in the world’s second-largest economy and what could it mean for future growth? Here’s what you need to know about the latest updates in China:

China’s Inflation Update: Rate Cuts Continue 

Just a week after the People’s Bank of China (PBOC) reduced its one-year medium-term loan facility for the first time in 10 months and also decreased its seven-day reverse repurchase rate, the Chinese central bank decided this week to continue on its rate-cutting trajectory.

On Tuesday, the PBOC reduced key lending rates also for the first time since August in an attempt to bolster China’s economy. As such, the central bank adjusted the loan prime rates. Specifically, they have lowered the one-year loan prime rate by 10 basis points, reducing it from 3.65% to 3.55%. In addition, the five-year loan prime rate was cut by 10 basis points, hence bringing it down from 4.3% to 4.2%. (Source:CNBC)

Many attribute the latest rate cuts to disappointing retail sales and trade data in May that may have indicated that the Chinese economy was on the cusp of deflation. Moreover, the cuts may have also been exacerbated by the fact that leading banks like JPMorgan (JPM) and Goldman Sachs (GS) recently lowered their full-year Chinese GDP forecast from 6% to 5.4%. China’s youth unemployment rates also showed signs of a weakening economy in May as it rose by 20.8% and exceeded April’s figures. 

Adding further pressure on the Chinese economy was the fact that Chinese real estate is also showing signs of a slump that could persist for years, according to many analysts. This was reflected in Hong Kong’s properties index which slid by 3%. One Goldman Analyst even stated that “based on our estimates, the property weakness will likely be a multi-year growth drag for China, but it could be less painful in 2023 than in 2022.”

Following the rate cuts and the aforementioned hurdles, the Chinese yuan fell to its lowest level in seven months on Tuesday. The Hang Seng (Hong Kong 50) index also took a hit and it's down 1.6% as of the time of the writing.

To tackle these economic hurdles, on Friday, June 16th, the Chinese State Council explained that “more forceful measures” must be taken to improve the state of the economy. In response, some economists commented that “wider policy statements, including the readout from Friday’s State Council meeting, make it clear that officials are increasingly concerned about the economy and that supporting growth is now taking precedence over other concerns, including those about bank profitability.”

Nonetheless, despite this perhaps dreary outlook, it may be worth noting that earlier this month it was revealed that inflation in China was cooling off in May as the Chinese CPI in May gained 0.2% which is slightly above April’s 0.1%. 

Seeing what other decisions the Chinese central bank makes in the near future may be worth keeping in mind in order to see whether or not any substantial changes in one of the world’s leading economies could materialize. 

How Are Chinese Rate Cuts Affecting Oil?

Besides affecting Chinese indices, the latest rate cuts have also sent ripples across the commodity markets. This is because, while China indeed cut benchmark lending rates, these cuts were below estimates. Consequently, concerns over oil demand grew in China; the world’s biggest Oil (CL) exporter. 

Some analysts believe that due to the fact that the rate cuts were expected, oil did not get a boost and that crude traders may be waiting for hints of a recovering economy before pouring their money into black gold again. 

Moreover, it is believed that higher interest rates can lead to lower demand, and one market strategist explicitly said that “downside risks to global growth remain a key overhang for the oil demand outlook...risk sentiments are on hold ahead of a series of hawkish Fedspeak lined up on the calendar this week.” 

As a result, on early Tuesday morning, Oil traded lower and August’s Crude Oil futures slid by 0.52 while the August Brent Oil (EB) slid by 0.22%. However, as of the time of the writing, it seems that Oil and Brent have recovered slightly as they have risen by 0.1% and 0.3% respectively. 

Chinese Tech Shines 

Despite the market’s woes, it seems that Chinese tech stocks rallied this month, perhaps suggesting that a much-needed rebound was on the horizon. It seems that one of the reasons behind this rally is the fact that Chinese tech shares were cheaper compared to American tech companies coupled with the fact that their earnings were better-than-expected. 

Additionally, during the weekend, “618 Shopping Day,” one of China’s biggest shipping events, took place and rendered better-than-expected results. The event, which is held by Chinese tech and e-commerce behemoth, JD.COM (JD) showed that the company surpassed predictions in its sales. In addition, another tech and eCommerce leader, Alibaba (BABA) revealed that sales exceeded predictions and that daily users grew rapidly.

Analysts commented that they “have observed improving fundamentals of many large-cap Chinese names” and that “this includes better regulatory environment, better-than-expected quarterly results, and improving profitability.”

So far this month, JD.COM and Alibaba rose by 15.2% and 10.9% while other Chinese tech companies like Tencent (0700. HK) rose 10.7% for the same period. Still, despite this rosy outlook, some analysts posit that these companies' “stock performance has not reflected these improvements, due to very cautious investor sentiment.” 

Overall, the Chinese stock market seems to be wavering back and forth between gains and losses. As such, it may be interesting to see if any changes materialize and whether or not the Chinese economy will be able to get its groove back.