China surprises with rate cuts as economy grapples with ‘confidence crisis’

China’s central bank unexpectedly cut rates on Tuesday, as policymakers continued to ramp up support for its struggling economy.

Early Tuesday, the People’s Bank of China trimmed the interest rate on 401 billion yuan ($55.25 billion) worth of one-year medium-term lending facility (MLF) loans from 2.65% to 2.50. It was the second rate cut in three months.

The move came just before China posted largely disappointing July data. Industrial output rose by 3.7% in July from a year ago, below the 4.4% increase analysts had expected, while retail sales also rose at a slower pace by 2.5% last month. 

Then in the late afternoon, the PBOC cut short term rates. Overnight, seven-day, and one-month standing lending facility rates were each trimmed by 10 basis points to 2.65%, 2.8% and 3.15%, respectively.

China is facing a “confidence crisis” as Beijing’s policy delay is being perceived as “inaction” to spur growth, according to an economist.  

“There’s no hiding from the fact we’ve had a very horrible July — not just the data we’ve seen coming up to this, but also today’s data,” Louise Loo, lead economist at Oxford Economics, told CNBC’s “Street Signs Asia” on Tuesday.   

The latest data comes on top of a slew of weak economic numbers over the past week including sluggish trade and consumer price numbers and record-low credit growth.

The lessons from the past two month “is that policy delay — markets are essentially seeing it as policy inaction,” Loo added.

“In a crisis such as this … you can’t really call it a consumption crisis or investment crisis. It’s really a confidence crisis,” she noted, adding the best way to tackle it “is to be very quick on the stimulus.”

China’s policymakers recently announced a raft of measures to boost consumption, private sector investment and foreign investment. Still, the overall approach to additional stimulus has been cautious.

The move toward stimulus has been “more targeted, more specific,” said Loo. “They’ve very clearly wanted to target the big ticket items in terms of consumption.”

“Is that really enough to lift consumer sentiment, business sentiment? I really don’t think that they’ve been doing enough in that front.”

China is grappling with an ongoing slump in its massive real estate sector that has taken a toll on its economy. Property market troubles have come to the forefront again with developer Country Garden now on the brink of default.

“The nervousness that investors have around Country Garden is not so much the problems that it’s facing. But the fact that the government has been quite silent on that,” said Loo, adding the property sector is headed for “a long overdue correction.”