Weekly Market Outlook

China Stability Falters as Factory Output, Investment Slow

China’s recent economic stabilization faltered in July as factory output, retail sales and investment all slowed.

Industrial production rose 6 percent from a year earlier in July, the National Bureau of Statistics said Friday. Retail sales climbed 10.2 percent last month, while fixed-asset investment increased 8.1 percent in the first seven months of the year. All three readings missed economists estimates.

The slowing growth sharpens the dilemma facing the nation’s policy makers — boost demand with cheap credit that risks undermining financial stability, or curb debt expansion even if that slows the economy. With tepid global demand giving no aid and businesses at home reluctant to invest, the government has increased fiscal support this year, even as it held off from further benchmark interest-rate reductions.

“The big concern is still sluggish investment,” said Zhou Hao, a Singapore-based senior economist at Commerzbank AG. “The central bank will maintain an easing bias to support the real economy, and a cut in rates or the required reserve ratio this year cannot be entirely ruled out.”

Economists had forecast investment would rise 8.9 percent in the January through July period. A slump in private investment is pacing the slowdown.

There was brighter news in real estate. Property development investment in the first seven months of the year rose 5.3 percent, while the value of property sales during the period soared 39.8 percent, NBS said. Home sales value rose 41.2 percent while new property construction increased 13.7 percent.

Electricity output jumped 7.2 percent in July, the fastest pace since late 2013, as more people switched on their air conditioning units for a reprieve from the summer heat. By industry, textiles and steel output remain sluggish, while car manufacturing was the outperformer with a 22.9 percent increase from a year earlier, the production data showed. Economists had forecast a 6.2 percent increase in industrial output.

“The traditional manufacturing sector is likely to continue to face strong headwinds as efforts to reduce overcapacity continue,” economists at Australia & New Zealand Banking Group Ltd. wrote in a recent note. “We expect the authorities to maintain an accommodative monetary policy. However, as deleveraging remains a policy priority, we believe fiscal policy will take the lead in boosting growth.”

Flooding has weighed on economic growth more than expected, while severe heat and weak foreign and domestic demand also contributed to the slowdown, an NBS official said at a briefing Friday. China’s worst floods since 1998 will shave as much as 0.2 percentage points from this quarter’s expansion, according to almost half of economists in a Bloomberg survey last month.

The NBS data also showed oil refineries slowed processing activity in July from a record as fuel-making units shut for seasonal maintenance.

The retail report showed food, drink and tobacco spending slowed. E-commerce again showed its strength, as online sales increased 27.5 percent in the January – July period. Economists had forecast a 10.5 percent increase in overall retail sales.

Reports earlier this week showed exports remained sluggish last month, signaling tepid global demand, while deteriorating imports raise concern domestic conditions may be weakening. Meantime, inflation remains well below the government’s target, giving room for monetary stimulus.

“Earlier stimulus policies will help the economy hold up in the third quarter before fading away at the year end,” said Harrison Hu, Singapore-based chief greater China economist at Royal Bank of Scotland Group Plc.

Government efforts to reduce excess industrial capacity will benefit the economy in the long run, said Sheng Laiyun, a spokesman for the statistics bureau. The tepid investment was partially due to the difficulty private businesses face when trying to enter sectors such as telecom, oil and gas, Sheng said at a briefing after the data release.

“The downbeat investment figures raise questions over the efficacy of recent policy easing,” Julian Evans-Pritchard, an economist at Capital Economics Ltd. wrote in a note. “Policy makers may therefore have to do more to reverse the recent trend in investment growth, most likely in the form of more forceful fiscal policy during the remainder of this year, if they want to prevent a renewed slide in economic growth.”