Chinese President Xi Jinping has resisted pulling the trigger on a major stimulus to revive the world’s second-biggest economy. The grim market reaction to a surprise rate cut shows investors want to see him take much bolder steps.

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The People’s Bank of China on Tuesday lowered the rate on its one-year loans — or medium-term lending facility — by 15 basis points to 2.5 percent, the steepest cut in three years. The move came shortly before the release of July data that showed weak consumer spending growth, sliding investment and rising unemployment.

Zooming out, the economic picture looks even worse. Bank loans plunged to a 14-year low last month, while deflation is setting in and exports are contracting. One of China’s largest property developers is at risk of default and a financial conglomerate with 1 trillion yuan ($138 billion) under management missed payments on investment products, stoking fears about possible contagion.

Several banks downgraded their annual growth estimates for China in the wake of the disappointing data. JPMorgan Chase & Co.’s team lowered its full-year forecast for 2023 to a 4.8 percent, while Barclays Plc. cut its growth estimate to 4.5 percent — both below China’s official target of around 5 percent expansion.

All of that is adding pressure on Xi to do more in two areas he has sought to avoid: Helping out the heavily indebted property sector and giving consumers more cash to spend — something a central bank adviser in China this week called “the most urgent goal.”

The failure to revive confidence more broadly risks leading to economic pain that could blow back on Communist Party leaders. Last year saw a wave of mortgage boycotts and unprecedented protests against Xi himself as residents got fed up with the world’s strictest Covid-19 restrictions.

Chinese authorities remain sensitive about the narrative over the economy, instructing analysts to avoid discussing deflation and restricting access to key data. China on Tuesday suspended publishing data on its soaring youth unemployment rate to iron out complexities in the numbers, fanning fears about transparency.

“The declining economy dramatically increases the risk of unrest,” said Drew Thompson, a former Pentagon official and businessman in China who is now a senior fellow at the Lee Kuan Yew School of Public Policy in Singapore. “The Communist Party should be circling the wagons.”

The struggles facing China are also bad news for the world. Stocks and bonds declined as concern grew that the global economy will suffer without a sustained recovery in China, which the International Monetary Fund has previously projected would be the top contributor to global growth through 2028.

US Treasury Secretary Janet Yellen this week said China’s slowdown was a “risk factor” for the American economy. Weaker imports of major commodities also threatens producers from Australia to Brazil, while softer demand for electronics will impact trade-dependent economies like South Korea and Taiwan.

The CSI 300 Index, a benchmark of onshore China stocks, ended 0.2 percent lower even after Bloomberg reported that Chinese authorities may cut the stamp duty on stock trades for the first time since 2008 — news that helped boost sentiment after the rate cut and weak Chinese data failed to impress investors.

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First Published:Aug 16, 2023 6:41 AM IST