China economic activity slows in July as reforms begin to bite

Reuters/Beijing


China’s economic activity slowed in July, with investment growing at its slowest pace since the turn of the century, as the world’s second-largest economy grappled with the painful restructuring of its older industrial sectors.
The weaker-than-expected data covering investment, lending, retail spending and factory output yesterday follows a run of poor numbers this month, keeping alive hopes the government will unleash more stimulus this year to meet ambitious economic growth targets.
“In light of persistent headwinds from the external sector, weak business sentiment, and a cooling property market, we believe that policymakers need to accelerate policy easing and reforms,” Jing Li, an economist at HSBC, wrote in a note.
The increased stimulus hopes cheered investors, with China’s blue-chip CSI300 Index ending at it highest close since early January.
China’s pace of fixed-asset investment slipped to 8.1% in January-July, the weakest growth since December 1999, and down from 9% in the January-June period.
Analysts had expected it to rise 8.8%.
The retreat was led by a 22.9% decline in mining, suggesting the government’s goal of cutting production in older industrial sectors is working.
China’s investment and net exports are slowing, with the government increasingly expected to boost headline growth through fiscal policies rather than interest rate cuts, analysts say.
Investors remain wary about the growth outlook amid painful reforms in the state-owned enterprise sector.
Private investment, which accounts for about 60% of overall investment, grew 2.1%, compared with 2.8% in the first half.
Meanwhile, growth in investment by state firms cooled to 21.8% Jan-July from 23.5%. The property sector, one of the few bright spots in China’s economy, also showed signs of struggle with real estate investment growth slowing to 5.3% from 6.1%.
The worsening investment trend was also seen in bank lending numbers with central bank data yesterday showing a slump in new yuan loans.
Chinese banks extended 463.6bn yuan in new loans in July, the lowest in two years and well below analysts forecasts of 800bn yuan, as credit demand from private businesses slowed significantly and tighter property investment rules weighed on mortgages demand.
Sheng Laiyun, a spokesman at the National Bureau of Statistics (NBS), said while companies from emerging sectors are willing to invest, some private firms still struggle to access financing.
Consumption softened with retail sales growth easing to 10.2% after a rise of 10.6% the prior month and factory output rose 6% in July from a year earlier, below the 6.1% analysts had expected.
Slowing growth in industrial production continued, partially due to the significant restructuring of traditional industries and also because of high summer temperatures and recent flooding, NBS analyst Jiang Yuan said.
“People are worried about a lack of solid demand over the next few years so they aren’t really investing, especially in capex, which is the driving factor of the slowing investment,” said Zhou Hao, Senior Emerging Markets Economist at Commerzbank in Singapore.
Total social financing, a broad measure of credit and liquidity in the economy that also includes off-balance sheet forms of financing, fell to 487.9bn yuan in July from 1.63tn yuan in June.
Meanwhile, central bank money supply data showed businesses were opting to sit on cash rather than invest it, raising concerns a “liquidity trap” is forming in China.
Growth in M1 money supply, which includes cash and short-term deposits, accelerated to 25.4% from a year earlier while M2 money supply, which includes longer-term deposits, grew only 10.2%, its weakest growth in 15 months.
Cars sales surged 23% year-on-year in July in China, the world’s biggest auto market, on sales of smaller passenger cars, an industry group said yesterday. A total of 1.85mn vehicles were sold in the country last month, the China Association of Automobile Manufacturers (CAAM) said in a statement. Growth in auto sales has accelerated for the three consecutive months as the country’s economy shows signs of stabilising.
The July growth rate was higher than the 14.6% gain recorded in June, though total sales were lower than the 2.07mn for the month. Sales of passenger cars with engines smaller than 1.6 litres jumped 38.6% year-on-year to 1.14mn in July, CAAM data showed.
The government slashed the purchase tax on passenger cars with small engines last October.
China’s car sales increased at their slowest rate in three years in 2015, rising less than 5% annually to 24.6mn units as the world’s second-largest economy lost momentum.
China’s average daily crude steel output fell in July from a record, government data showed yesterday, providing some respite to overseas rivals angered by a torrent of cheap steel from Chinese mills in the past year.
The decline partly reflects China’s efforts to address a chronic glut.
Some analysts predict output may shrink further in the months ahead as more mills shut in a sector undergoing its most significant — and painful — restructuring in two decades. The pullback was also due to softer domestic demand, particularly around July as construction typically drops during the summer lull.
Economic activity broadly slowed in July, with crude oil production sliding to its weakest level since October 2011 on a daily basis and coal output extending its slump.
In the months ahead, further capacity cuts, mostly via stricter environmental controls, could continue to shrink China’s steel output, said Richard Lu, analyst at CRU consultancy in Beijing.
“Market participants are all expecting the government will take stronger measures to close capacity for the rest of the year,” Lu said.
Daily steel output averaged 2.15mn tonnes last month after a surprise increase to an all-time high of 2.32mn tonnes in June, according to Reuters calculations based on data released by China’s National Bureau of Statistics.
The decline was in line with a 5.9% drop in Chinese steel exports in July, though shipments remain elevated and total shipments in January-to-July were up from a year earlier.
China has pledged to cut its steel capacity by around 45mn tonnes this year and by 140mn tonnes by 2020.
Yet capacity reductions amounted to just 47% of China’s annual target by end-July, suggesting tougher measures ahead.
Some local governments have resisted Beijing’s call for cuts in order to protect jobs and their economies.
A speculation-induced spike in steel prices this year has also encouraged some Chinese producers to boost output for export to counter slower domestic demand.
That has led to accusations from rival producers that China is selling into export markets at below cost, which the country has denied.
Yesterday, the most-traded rebar, used in construction, rose 0.27% to 2,578 yuan ($389) a tonne on the Shanghai Futures Exchange after the output data.
The contract hit 2,639 yuan on Wednesday, its highest since April 26.
For July, China’s steel production rose 2.6% from a year earlier to 66.81mn tonnes, bringing output in the first seven months of the year to 466.52mn tonnes, down 0.5%.
Output of steel products rose 4.9% to 95.94mn tonnes last month, and was up 1.9% over January-July to 657.05mn tonnes.