The People’s Bank of China on Monday cut the medium-term lending rate, through which it provides one-year loans to the banking system, by 10 basis points to 2.75 percent, the first cut since January. Analysts polled by Bloomberg had expected the central bank to leave interest rates unchanged. The decision underscored heightened anxiety in Beijing as it tries to combat a months-long slump in consumer demand caused by its long-standing zero-Covid policy, as well as knock-on effects from property developers and slowing global growth. Despite Beijing’s plans to inject hundreds of billions of dollars in stimulus to boost growth, China’s economy narrowly escaped a contraction in the second quarter. Official statistics released on Monday reflected worse-than-expected consumer and factory activity as the pace of the country’s economic recovery from sweeping lockdowns falters. Retail sales, a key indicator of consumption, rose 2.7 percent year-on-year in July, while industrial production, a driver of growth early in the pandemic, was 3.8 percent higher. Analysts had forecast increases of 5% and 4.6% respectively. Youth unemployment rose to a record 19.9 percent, piling more pressure on Xi Jinping’s government to revive the economy. Experts expect China’s economic slowdown to lead to looser monetary policy and fiscal stimulus, but some are pessimistic about the scale and speed of Beijing’s response. “China’s Development in [the second half] will be significantly hampered by its zero-Covid strategy, the downturn in property markets and a possible slowdown in export growth,” said Ting Lu, Nomura’s chief China economist. Beijing’s political support could be too little, too late and too ineffective.” Analysts also noted that Beijing’s central bankers were reluctant to cut interest rates amid worries about rising debt and inflation. “But the PBoC seems to have decided it now has a more pressing problem. The latest data points to lackluster economic momentum in July and a slowdown in credit growth, which was less responsive to policy easing than during previous economic downturns,” said Julian Evans-Pritchard, senior China economist at Capital Economics. Société Générale described July’s figures as “simply bad”, with output, investment and consumption slowing “under the crushing weight of the zero-Covid policy” and with “the housing sector in freefall”.

“Policymakers have begun to communicate their concerns about overstimulating the economy with too much liquidity, while the real risk is just the opposite in our view – too little easing and too weak a recovery,” the bank’s analysts said. Xi’s zero-Covid policy – which imposes strict lockdowns where cases of the virus are discovered – puts further pressure on the outlook. Several Chinese cities, including Haikou on the southern island of Hainan, as well as Urumqi in the western region of Xinjiang, have imposed or extended lockdown restrictions in some areas, with cases rising nationwide over the weekend. The Hainan lockdown has sparked small-scale protests among tens of thousands of travelers stranded in the tourist destination. In Shanghai, authorities are testing the use of drones to ensure residents scan their health codes when entering buildings. The health code is recorded in a mandatory smartphone app that determines whether people can travel based on their exposure to Covid-19. Additional reporting by Gloria Li and Primrose Riordan in Hong Kong