China grows on factories and property sales

CHINA’s factory output and retail sales grew faster than expected in August as a strong housing market and a government infrastructure spending spree underpinned growth.

Industrial output grew the fastest in five months as demand for products from coal to cars rebounded, though analysts warned the outlook was clouded by weakness in manufacturing investment and a lack of spending by private companies.

“It is very clear that the data is improving because of the property market. This is not sustainable,” Commerzbank economist Zhou Hao said. “It is a good time for China to deliver on structural reform, especially on the state-owned enterprise side, to restore confidence in the economy,” he said, referring to a long-promised overhaul of stateowned enterprises.

Improvements in August, while modest, suggest China’s third-quarter growth is holding up better than expected just a few months ago, and likely remains within the government’s 2016 target range of 6.5%-7%, despite the drop in private investment, which has left the economy more dependant on government spending.

Industrial output rose 6.3% in August from a year earlier, data showed on Tuesday. Analysts had expected it to pick up only slightly to 6.1%.

China’s steel industry, in particular, has perked up as capacity cuts and production curbs boost prices and profits, while the infrastructure spree and housing boom have spurred demand for building materials.

China’s crude steel output rose 3% in August from a year ago, the sixth straight monthly rise. Its biggest listed steelmaker, Baoshan Iron & Steel (Baosteel) said it had raised its prices for October, its eighth price hike in 2016.

Retail sales also handily beat expectations, with growth accelerating to 10.6% from 10.2% the previous month. Analysts had forecast an increase of 10.3%. Car sales hit a three-and-a-half year high in August as buyers rushed to buy vehicles before a tax cut expires at year-end.

Trade data last week showed imports rose for the first time in nearly two years, while export declines eased.

Fixed-asset investment was unchanged at 8.1% over the first eight months of 2016.

Still, the rate of growth in investment remained the slowest since December 1999, and details showed a growing imbalance between public and private spending that raised questions about China’s longerterm growth prospects.

China International Capital Corporation said while the headline investment figures were solid, data on new project starts, a leading indicator for future activity, softened in August.

Highlighting Beijing’s increasing reliance on government spending to drive the economy, investment by state firms surged 21.4% in the first eight months. China’s fiscal spending rose 12.7%.

Property investment rose 6.2% in August, according to Reuters calculations, compared with 1.4% in July, while sales by floor space grew 25.5%.

“Property sales continue to expand at a rapid pace. We are sceptical how long this can last given that fundamental factors point to housing demand growth in the low single digits,” Capital Economics economist Julian Evans-Pritchard wrote.

The strength in the property market compared with only 2.8% growth in fixed asset investment in the manufacturing sector for the year through August.

Private investment grew just 2.1% in the first eight months of 2016, the same pace as in January-July and remaining at record lows.

While private firms boosted monthly spending 2.3%, reversing a two-month slide, the issue remains a key concern among policy makers, who have pledged to improve operating conditions for the more efficient private sector.

Property sales continue to expand at a rapid pace. We are sceptical how long this can last