China’s economic growth cools in Q2

Efforts to contain debt hurt activity

BEIJING: China’s economy expanded at a slower pace in the second quarter as Beijing’s efforts to contain debt hurt activity, while June factory output growth weakened to a two-year low in a worrying sign for investment and exporters as a trade war with the United States intensified.

The world’s second-largest economy grew 6.7% in the last quarter year-on-year — matching expectations — and looks set to meet the official 2018 growth target of around 6.5%, though the trade row with Washington, a slowing property market and lower shipments have sharply increased the risks to the outlook.

“We expect growth in the second half to be challenged by the slow credit growth and softer real estate activity. Also, the intensifying trade conflict with the US will start to weigh on growth,” Louis Kuijs, head of Asia economics for Oxford Economics in Hong Kong, wrote in a note.

The second-quarter GDP figure was slightly below the first quarter’s 6.8%, the National Bureau of Statistics said yesterday, with net exports a drag on overall first half economic growth.

As the trade tussle with Washington shows no signs of ebbing and the external sector continues to weigh on China’s economy, more timely monthly activity data indicated growth was slowing at a faster pace going into the second half of the year.

Despite slower factory output growth overall, China’s steel mills churned out record amounts of the construction material in June as producers rushed to cash in on hefty margins.

China, which accounts for half the world’s capacity, produced 80.2 million tonnes of crude steel last month, data showed on Friday. That’s just shy of the 81.6 million tonnes the United States produced in the whole of 2017, according to World Steel Association data.

June output was below May’s record 81.13 million tonnes, but June has one less day, setting a new daily average production record for a third month in a row at 2.67 million tonnes, according to Reuters’ calculations.

China’s economy has already felt the pinch from a multi-year crackdown on riskier lending that has driven up corporate borrowing costs, prompting the central bank to pump out more cash by cutting reserve requirements for lenders.

The property market, a key economic driver, also slowed, as property investment posted its weakest growth in six months in June, with sales also cooling.

Faced with slowing domestic demand and the trade war risks, Chinese policymakers have started to step up support for the economy and have softened their stance on deleveraging.

Some analysts are calling for even stronger measures.

“If the situation gets worse a lot faster than what we expect I do think Chinese authorities need to beef up supportive measures, both fiscal and monetary,” said Iris Pang, Greater China economist at ING in Hong Kong.

China is looking to consumer spending to drive the economy as it rebalances away from government-driven investment and the export sector, but the evidence in the first half was less encouraging than headline statistics suggested.

Final consumption contributed 78.5% of first-half growth, compared to 63.4% in the same period last year, and higher even than in the first quarter, when spending typically peaks due to the influence from the Chinese New Year holiday.

But that data also include government spending and is pushed up when net exports are a negative factor as they have been this year.

Retail sales growth picked up in June from May, but year-to-date growth is down to 9.4% from 10.4% in the first half of last year. The surveyed jobless rate in June was unchanged from May at 4.8%.

While economists are generally sanguine about China’s slower growth trajectory, many are wary of the risks to the outlook from the escalating trade dispute with the United States.

“Uncertainty about the scale and composition of US tariffs on China’s exports is already dampening business confidence and delaying investment, especially crossborder investment,” Oxford Economics’ Kuijs said.

“If the US and China do not resume talks in the next two months or so, the conflict will escalate further, with major economic implications for themselves and the global economy.”