Chinese economy starts to feel tariff impact
Country ‘faces some new problems and new challenges,’ Politburo said in a statement
BEIJING— China’s leadership pledged to ensure economic stability as its trade fight with the U.S. started to pinch growth, signaling that a bigger stimulus could be on the horizon.
A Tuesday meeting of the Politburo, whose members are China’s top arbiters of power, highlighted the external challenges faced by the world’s second-largest economy. Without specifically mentioning the trade conflict with the U.S., a statement issued after the meeting by state media made clear the brawl is a big threat to growth and stability, trumping issues such as debt control.
The Chinese economy “faces some new problems and new challenges,” the statement said. “There are obvious changes in the external environment.”
The meeting came as official data showed early Tuesday that China’s business activities faltered in July—the first official data to reflect the impact of U.S. tariffs—adding to signs that trade tensions have started to dent economic growth.
China’s economic growth has been on a controlled descent for most of this decade, propped up at times by shots of easy credit that have helped make debt a long-term threat for the Chinese economy. With growth still buoyantly above the government’s 6.5% target, Mr. Xi has taken aim at debt and other financial risks the past two years to put the economy on sounder footing.
Now that campaign is taking its toll. Signs are building that the economic expansion is losing steam—from weakening investment in factories to anemic household consumption and rising corporate defaults.
The trade fight with the U.S. puts growth further at risk, making Mr. Xi’s campaign look unsustainable. In recent weeks, China’s central bank has been pumping funds into the country’s financial system. Local authorities are restarting projects that were halted due to the previous tightfisted policies.
With easing measures under way, the high-level meeting Tuesday paved the way for more to come. The statement called for pro-growth measures such as greater government spending on highways, rail lines and other infrastructure projects and keeping liquidity conditions “reasonable and adequate”—code for easier credit.
The official statement also sought to allay concerns that Beijing might retaliate against the Trump administration’s trade offensive by targeting U.S. businesses. “Legitimate rights of foreign companies in China will be protected,” it said.
In the past month, China’s Commerce Ministry, which oversees foreign investment, has instructed local officials to gauge how the biggest round of U.S. tariffs to date—25% duties on $34 billion of Chinese goods imposed in early July—is affecting American businesses operating in China, according to Chinese officials. In particular, officials are looking for signs of companies potentially moving facilities out of China. That would be a blow to Beijing’s effort to attract foreign capital and keep people employed at a time of gathering economic gloom.
Latest official surveys of factories and service providers pointed to sluggish domestic demand. Companies that had been frontloading shipments to stay ahead of higher tariffs may have slowed production and investment, economists say.
“Impacts from the tariffs started to kick in this month,” said Liu Xuezhi, an economist at Bank of Communications.
The official manufacturing purchasing managers’ index fell to a five-month low of 51.2 from June’s 51.5, data released by the National Bureau of Statistics showed Tuesday. July’s reading came in slightly lower than economists’ expectations.
The import subindex of the official PMI slipped to a 23month low, while the export subindex held steady thanks to a weaker yuan, said Julian Evans-Pritchard, an economist at Capital Economics.
In addition to trade friction, disruptions caused by weather conditions, such as extreme heat and typhoons, also contributed to the slowdown, according to Zhao Qinghe, an analyst with the bureau. Both output and demand weakened in July. A subindex measuring production dropped to 53.0 from 53.6, while the new orders index fell to 52.3 from 53.2. Despite July’s fall, the headline index has stayed above the 50 mark, which separates an expansion of activity from a contraction, for nearly two years.
An official measure of activity outside China’s factory gates, also released Tuesday, declined to an 11-month low in July, as cooling manufacturing and construction activities weighed on the sector.
“Today’s data are consistent with our view that China’s economy is on track to slow further this quarter and next, triggering additional policy easing,” Mr. Evans-Pritchard said.
Beijing has stepped up its efforts to spur economic growth in recent weeks, a sign that the government is becoming more worried about slowing growth as trade tensions rise.
The country’s cabinet, the State Council, last week encouraged local governments to quickly tap the bond market. The central bank lent more than 500 billion yuan ($73 billion) to banks, a push to get them to lend and the largest one-time amount since such injections started in 2014.
China’s efforts to tame debt weighed on domestic demand, and recent economic-policy easing measures may boost sentiment over the medium term but could come at a cost, said Betty Wang, an economist at ANZ.
“While this is likely to lift domestic sentiment over the medium term, we are mindful of whether China will shift back to pump-priming the economy,” Ms. Wang said.