Growth in China is eas­ing off

In­vest­ment at 18-year low

The Mercury - - BUSINESS REPORT - Kevin Yao and Lusha Zhang

CHINA posted rare dis­ap­point­ing data yes­ter­day, in­clud­ing its slow­est growth in in­vest­ment in nearly 18 years – sug­gest­ing that the world’s sec­ond-largest econ­omy is fi­nally start­ing to lose some mo­men­tum as bor­row­ing costs rise.

Fac­tory out­put and retail sales also grew less than an­tic­i­pated, though a re­bound in prop­erty sales and con­struc­tion starts is likely to keep China’s over­all growth rel­a­tively ro­bust and com­fort­ably on tar­get ahead of a key lead­er­ship reshuf­fle next month.

“I think the risk (for China) isn’t in the next few months, but rather the next cou­ple of years,” said Cap­i­tal Eco­nomics’s Ju­lian Evans-Pritchard.

“Progress on key struc­tural re­forms that re­ally mat­ter, such as boost­ing the per­for­mance of state-owned en­ter­prises, has been quite slow and the struc­tural drags on growth re­main quite strong and are real risks.”

An­a­lysts had widely ex­pected China’s Au­gust data to show that in­dus­trial out­put and retail sales growth had ac­cel­er­ated af­ter fad­ing slightly in July, while in­vest­ment was seen as only marginally softer.

That would have fit into a pat­tern of stronger-than-ex­pected read­ings from China in the first half of the year and up­beat sur­veys on Au­gust fac­tory ac­tiv­ity.

A year-long, gov­ern­ment-led con­struc­tion boom has lifted de­mand and prices for ev­ery­thing from ce­ment to steel to glass, help­ing off­set an ex­pected drag from prop­erty cool­ing mea­sures and a reg­u­la­tory crack­down on riskier types of fi­nanc­ing.

But Au­gust’s data sug­gested the strong boost from Bei­jing’s in­fra­struc­ture build­ing spree may be start­ing to fade.

Fixed-as­set in­vest­ment, a key growth driver for the world’s sec­ond-largest econ­omy, grew 7.8 per­cent in Jan­uary-Au­gust from a year ear­lier, the weak­est pace since De­cem­ber 1999 and cool­ing from 8.3 per­cent in Jan­uary to July.

The main drag ap­peared to be a slow­down in in­fra­struc­ture in­vest­ment due to a sig­nif­i­cant drop-off in gov­ern­ment fis­cal spend­ing over the past two months, an­a­lysts said.

China front loaded fis­cal spend­ing this year to pro­duce rosy growth ahead of the once-in-five-years Com­mu­nist Party Con­gress next month, Evans-Pritchard said.

But lo­cal govern­ments are con­strained by an­nual bud­gets and have had to pare back their spend­ing in the sec­ond half of this year, he added.

Domino ef­fect

That likely had a knock-on ef­fect on in­dus­trial out­put, which rose 6 per­cent in Au­gust year-on-year, the weak­est pace in nine months, sta­tis­tics bu­reau data showed.

An­a­lysts had pre­dicted out­put would grow 6.6 per­cent in Au­gust, up from 6.4 per­cent in July. The sta­tis­tics bu­reau said unusu­ally hot and wet weather weighed on in­dus­trial out­put last month, adding that the econ­omy re­mained on a steady, im­prov­ing trend. On a monthly ba­sis, out­put rose nearly half a per­cent.

China’s crack­down on pol­lu­tion may have also dented in­dus­trial out­put, as Bei­jing looks to close older, smog-belch­ing mines and fac­to­ries, said Nie Wen, an econ­o­mist at Hwabao Trust in Shang­hai.

But econ­o­mists at No­mura main­tained their view that the econ­omy would ex­pand 6.8 per­cent in the third quar­ter from a year ear­lier, eas­ing only slightly from 6.9 per­cent in the first half.

That would keep China on track to eas­ily beat the gov­ern­ment’s full-year growth tar­get of around 6.5 per­cent, even if there is some fur­ther soft­en­ing late in the year.

Over­all in­vest­ment may have soft­ened fur­ther if not for an un­ex­pected re­bound in the prop­erty mar­ket, which di­rectly af­fects 40 other busi­ness sec­tors in China.

State curbs

De­spite a se­ries of gov­ern­ment curbs which have largely suc­ceeded in cool­ing red-hot hous­ing prices, ac­tiv­ity in the prop­erty mar­ket snapped back in Au­gust, pos­si­bly as de­vel­op­ers turn their fo­cus to smaller cities with fewer re­stric­tions.

Prop­erty in­vest­ment, which mainly fo­cuses on res­i­den­tial real es­tate, but also in­cludes com­mer­cial and of­fice space, grew 7.8 per­cent in Au­gust year-on-year, ver­sus 4.8 per­cent in July, ac­cord­ing to cal­cu­la­tions from yes­ter­day’s data.

New con­struc­tion starts mea­sured by floor area, a telling in­di­ca­tor of de­vel­op­ers’ con­fi­dence, were up 5.3 per­cent af­ter con­tract­ing in July for the first time since last Septem­ber.

Growth of pri­vate in­vest­ment slowed to 6.4 per­cent in Jan­uary-Au­gust from 6.9 per­cent in the first seven months of the year, sug­gest­ing smal­land medium-sized pri­vate firms still face chal­lenges in ac­cess­ing in­vest­ment-fi­nance.

Pri­vate in­vest­ment ac­counts for about 60 per­cent of over­all in­vest­ment in China.

Retail sales also con­founded mar­ket ex­pec­ta­tions, ris­ing 10.1 per­cent in Au­gust yearon-year, the slow­est pace in six months and cool­ing from 10.4 per­cent in July. An­a­lysts had ex­pected a slight pick-up in de­mand. Sales rose at a de­cent clip from a month ear­lier. – Reuters

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