China Data Shows Pressure Building on Economy Despite Output Surprise

September 14, 2018 Updated: September 14, 2018

BEIJINGChina’s growth is set to cool further in coming months, with a barrage of August economic data doing little to dispel views that domestic demand is softening and government support measures will take some time to kick in.

While industrial output and retail sales readings on Sept. 14 were better than expected, most other indicators over the past week were more downbeat, with a key investment gauge falling to a fresh low and broad credit growth being the slowest on record.

Two other bulwarks of the economy are also starting to look a bit shaky, with exports expected to succumb to the cumulative weight of U.S. tariffs and the property sector losing a step from July.

“We believe China’s overall economy continues to slow, and this could worsen in coming months,” economists at financial services firm Nomura said in a note.

Nomura and other China watchers expect more growth-boosting measures from Beijing in coming months to cushion the economy and weather the U.S. trade war, but some warn high debt levels may give policymakers less room for stimulus than in the past.

FALSE HOPES

On the surface, two bright spots in the August data were industrial output and retail sales, which picked up more than forecast.

Most economists, however, believe the gains are unlikely to be sustained, with business conditions in the world’s second-largest economy expected to get worse before they get better.

Industrial output rose 6.1 percent from a year earlier, China’s National Bureau of Statistics (NBS) said, a tick better than July.

Retail sales rose 9.0 percent, driven by jewelry and home appliances. Analysts had expected 8.8 percent, unchanged from July and not far from a 15-year low.

A closer examination of both data series, however, pointed to signs of underlying weakness.

Industrial exports looked solid, but analysts believe companies have been rushing out products, or “frontloading,” to beat U.S. tariffs, raising the risk of a slump later in the year.

Production of key goods such as motor vehicles and transport equipment continued to decline. Output of cars barely grew, while steel mills, aluminum smelters, and oil refiners all throttled back output from recent high levels.

Growth in high-tech products like semiconductors and industrial robots also slowed sharply.

Auto sales, which account for a tenth of retail sales, fell 3.2 percent on-year as Chinese consumers turned more cautious.

INVESTMENT STILL SLUGGISH

Investment dataa key indicator of future activityalso pointed to a further loss of economic momentum.

Fixed-asset investment growth slowed to 5.3 percent from January to August, weighed down again by slowing infrastructure growth. Analysts polled by Reuters had expected 5.5 percent, the same as the previous all-time low hit last month.

For August, fixed-asset investment rose 4.6 percent, Reuters calculations showed.

Growth in infrastructure spending, a powerful economic driver last year, also slowed to 4.2 percent in the first eight months of the year, from 5.7 percent from January to July.

While Beijing has accelerated approvals for road and rail projects in recent months, a familiar tactic used in past downturns, analysts note it will take time for construction to begin and put a floor under weakening economic growth.

“Fixed-asset investment growth is expected to stabilize, but talking of a rebound, I suspect the difficulty will be relatively big,” said Statistics Bureau spokesman Mao Shengyong.

Private sector fixed-asset investment rose 8.7 percent from January to August, easing marginally but still a source of support. Private investment accounts for about 60 percent of overall investment in China.

Real estate, one of the few standouts on the investment side, also moderated as the Chinese regime recently took severe measures to cool the overheating market. While growth was still solid at 9.2 percent on-year. But a sustained tail-off could sharply increase the risks to the economy, especially if the trade war worsens.

With Washington ratcheting up trade pressure, Chinese policymakers have shifted their focus in recent months to easing credit conditions and shoring up business confidence.

In addition to ramping up spending, China is pumping more money into the banking system to bring down financing costs.

It is also urging banks to keep lending to smaller firms, but rising bad loans and defaults are making lenders cautious, complicating the central bank’s policy push.

Top officials have vowed they will not resort to strong stimulus as in past slowdowns, a choice that boosted growth but fueled a mountain of debt and systemic financial risks that regulators are still struggling to address.

By Kevin Yao & Stella Qiu

 

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