China eco­nomic growth fal­ters in July, yuan's slide adds to wor­ries

The Pak Banker - - BUSINESS -

Growth in China's fac­tory out­put, in­vest­ment and re­tail sales were all weaker than ex­pected in July, adding pres­sure on Bei­jing to roll out more mea­sures to pre­vent a deeper slow­down, days af­ter it shocked mar­kets by de­valu­ing its cur­rency.

While the cen­tral bank in­sisted on Wed­nes­day it would not let the yuan slide too far, the de­val­u­a­tion came days af­ter data showed a hefty drop in ex­ports and pro­ducer prices, which clearly weighed on Chi­nese man­u­fac­tur­ers last month.

Nearly all data re­leased for July was weaker than econ­o­mists had forecast, point­ing to fur­ther de­te­ri­o­ra­tion in the world's sec­ond-largest econ­omy. Data for June had fu­elled some hopes that ac­tiv­ity was sta­bil­is­ing af­ter pol­i­cy­mak­ers un­leashed the big­gest burst of stim­u­lus since the global fi­nan­cial cri­sis. "This kind of data will only ac­cen­tu­ate the neg­a­tive out­look that ev­ery­one has about the econ­omy," said Louis Kuijs, China economist at Royal Bank of Scot­land in Hong Kong.

"Many peo­ple were ex­pect­ing an im­prove­ment and there is no im­prove­ment. Things are get­ting worse rather than get­ting bet­ter. This kind of data makes it re­ally chal­leng­ing to achieve the of­fi­cial 7 per­cent growth (tar­get) this year."

Fac­tory out­put rose 6.0 per­cent in July from a year ear­lier, slow­ing from June's 6.8 per­cent rise and hit­ting a three-month low. Econ­o­mists had ex­pected a 6.6 per­cent rise. Fixed-as­set in­vest­ment, a cru­cial driver of the world's sec­ond-largest econ­omy, also dis­ap­pointed, ris­ing 11.2 per­cent in the first seven months com­pared with the year-ago pe­riod, the weak­est pace in nearly 15 years, the Na­tional Bureau of Sta­tis­tics showed on Wed­nes­day.

Mar­kets had ex­pected an 11.5 per­cent rise, which would have been a slight im­prove­ment from June and put the out­look for the sec­ond-half of the year on some­what more solid foot­ing. Prop­erty in­vest­ment growth cooled to 4.3 per­cent, the weak­est since March 2009, de­spite a pick-up in hous­ing sales. The in­vest­ment fig­ure is be­ing closely watched as the gov­ern­ment tries to quicken in­fra­struc­ture spend­ing to shore up growth.

Re­tail sales rose 10.5 per­cent in July from the same time last year, slightly be­low fore­casts for 10.6 per­cent growth, which would have been even with June's read­ing. Auto sales fell 7.1 per­cent even as car­mak­ers slashed prices and of­fered sweeter in­cen­tives. The slug­gish ac­tiv­ity fig­ures fol­lowed dis­ap­point­ing trade and in­fla­tion read­ings ear­lier this month that showed per­sis­tent weak­ness in the econo- my de­spite re­peated stim­u­lus mea­sures. The cen­tral bank has re­peat­edly cut in­ter­est rates and banks' re­serve re­quire­ment to boost credit and lower bor­row­ing costs, and fur­ther pol­icy eas­ing is widely ex­pected to avert a sharper slow­down.

If con­di­tions do not im­prove soon, growth could fall be­low 6.5 per­cent in the cur­rent quar­ter, from 7 per­cent in the sec­ond quar­ter, ANZ econ­o­mists said in a note. Some econ­o­mists be­lieve China's econ­omy is al­ready grow­ing only half as fast as of­fi­cial data shows, or even less.

On Tues­day, the Peo­ple's Bank of China shocked global mar­kets by de­valu­ing the yuan by nearly 2 per­cent, a move it billed as a free-mar­ket re­form but which some sus­pect could be the be­gin­ning of an en­gi­neered, longer-term de­pre­ci­a­tion of the ex­change rate to boost ail­ing ex­ports.

The yuan fell fur­ther on Wed­nes­day, tak­ing its two-day losses to more than 4 per­cent at one point. "The July data is over­all dovish (for pol­icy) ... but in it­self surely did not war­rant such an ex­tended fall in the yuan as the num­bers are still highly re­spectable," said Ch­ester Liaw, an economist at Forecast Pte Ltd in Sin­ga­pore. Re­gard­less of Bei­jing's mo­tives for the cur­rency pol­icy u-turn, an­a­lysts said the de­cline in the yuan so far was too mild to spur global de­mand for Chi­nese goods.

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