Stuttering China recovery weighs on Asian markets

Asian markets mostly rose Monday as investors cheered signs of cooling US inflation but optimism was dampened by data showing China’s economic recovery stuttering under Covid-19 restrictions and a slumping property sector.

China’s central bank slashed key interest rates in a surprise move Monday as a raft of data showed weakness in the world’s second-largest economy.

The figures showed China’s industrial production and retail sales growth for July came in lower than expected. Industrial production was up 3.8 percent year-on-year, but down from 3.9 percent in June and well below analysts’ forecasts.

“The risk of stagflation in the world economy is rising, and the foundation for domestic economic recovery is not yet solid,” China’s National Bureau of Statistics warned.

Beijing’s rigid adherence to a zero-Covid strategy has held back economic recovery as snap lockdowns and long quarantines batter business activity and a recovery in consumption.

“July’s economic data is very alarming,” Raymond Yeung, Greater China economist at Australia & New Zealand Banking Group, told Bloomberg.

“The Covid-zero policy continues to hit the service sector and dampen household consumption.”

July’s retail figures confirmed how fragile consumer confidence still is, said CMC Markets analyst Michael Hewson.

“This weakness in the Chinese economy comes against the struggle to adapt to a zero-Covid policy, which the government shows little sign of relaxing, against a backdrop of rising cases,” Hewson said.

“Problems in the property sector also aren’t helping, where many home buyers are halting mortgage payments in protest at delays to the completion of new homes.”

Hong Kong was down 0.5 percent and Shanghai ended marginally lower to erase early gains after a mixed session.

Tokyo was the standout in Asian trade, closing 1.1 percent higher on easing concerns over US inflation and as GDP data showed the Japanese economy recovering after the government lifted Covid-19 curbs on businesses.

Other Asian markets also got a lift from Wall Street which ended Friday on a positive note after consumer and producer price data indicated a meaningful cooling in inflation.

Sydney rose 0.5 percent and Taipei was up 0.8 percent, even as China said it had organised fresh military drills around Taiwan as a delegation of US lawmakers visited the island.

Wellington, Manila and Bangkok also saw gains. Singapore and Jakarta were lower while Seoul and Mumbai were closed for holidays.

The markets have been concerned that, after two consecutive Federal Reserve increases in borrowing costs of three-quarters of a percentage point, further hikes of a similar magnitude could choke off economic recovery. 

Signs of improving inflation data last week have prompted debate on whether the Fed may pivot more quickly from its recent posture of moving aggressively to hike interest rates. 

Investors will be watching the release on Wednesday of the minutes from the Fed’s last policy meeting in July for clues to the US central bank’s rate plans.

“We’re definitely heading in a better direction,” Kristina Hooper, Invesco chief global market strategist, told Bloomberg Television. 

“It looks like we are passed peak for inflation. The problem is inflation is still very, very high.”

Oil prices slipped in Asian trade with both main contracts down one percent, with WTI at $91.19 and Brent trading at $97.21 as the stuttering Chinese economic recovery added to concerns about demand.

– Key figures at around 0715 GMT –

Tokyo – Nikkei 225: UP 1.1 percent at 28,871.78 (close)

Hong Kong – Hang Seng Index: DOWN 0.5 percent at 20,081.06

Shanghai – Composite: FLAT at 3,276.09 (close)

London – FTSE 100: UP 0.4 percent at 7,532.46

Euro/dollar: DOWN at $1.0236 from $1.0261 Friday

Pound/dollar: DOWN at $1.2099 from $1.2135 

Euro/pound: UP at 84.61 pence from 84.53 pence

Dollar/yen: DOWN at 133.34 from 133.50 yen

West Texas Intermediate: DOWN 1.0 percent at $91.19 per barrel

Brent North Sea crude: DOWN 1.0 percent at $97.21 per barrel

New York – Dow: UP 1.3 percent at 33,761.05 (close)