China's economy cools further amid trade spat

Investment growth at record low; Beijing shifts focus to boosting domestic demand

An employee works on a carbon fiber production line at a factory in Lianyungang in China's eastern Jiangsu province, on Aug 9, 2018. PHOTO: AFP

BEIJING • China's economy is showing signs of cooling further as the US prepares even tougher trade tariffs, with investment growth slowing to a record low and consumers turning more cautious about spending, data showed yesterday.

Fixed-asset investment expanded by a less-than-expected 5.5 per cent in January to July, a result of Beijing's crackdown on lavish local government borrowing for projects to boost growth.

Industrial output also undershot expectations, weighed down by pollution curbs and the uncertain trade outlook, adding to expectations that the authorities would roll out more policy stimulus measures.

With the trade war threatening more pressure on China's already slowing economy, Beijing has shifted its focus to boosting domestic demand and is taking a more measured approach in its campaign to reduce financial risks and debt, which has pushed up borrowing costs and triggered a rising number of defaults.

The government has pledged to ramp up spending on railways and roads - its traditional "go-to" approach when the economy slows - while the central bank is pumping more money into the system and urging banks to offer more loans at cheaper rates to small businesses.

"Admittedly, infrastructure spending may soon bottom out, given the recent shift towards a looser fiscal stance and monetary easing should eventually drive a turnaround in credit growth," Capital Economics senior China economist Julian Evans-Pritchard wrote in a note.

The Shanghai "Nifty 50" stock index fell about 0.8 per cent after the disappointing data, which added to a sour mood in global financial markets.

The pace of fixed-asset investment was the weakest on record going back to early 1996, according to data on Reuters Eikon. Investment had been expected to grow 6 per cent in the first seven months of the year, steady from January to June. For July, fixed-asset investment grew 3 per cent from a year earlier.

Retail sales also missed expectations, with Chinese consumers more reluctant to spend on everything from cosmetics and other everyday goods to big-ticket items such as home appliances and furniture.

Sales rose 8.8 per cent last month from a year earlier, below an expected 9.1 per cent and down from 9 per cent in June, despite a broad import tax cut that kicked in last month.

Industrial output also failed to pick up as expected. It rose 6 per cent last month, missing analysts' estimates for 6.3 per cent and unchanged from June.

In one of the few encouraging spots in the data, private sector fixed-asset investment rose 8.8 per cent in January to July, picking up from 8.4 per cent in the first half. It accounts for about 60 per cent of overall investment in China.

But growth in infrastructure spending, a powerful economic driver, slowed to 5.7 per cent in the first seven months from 7.3 per cent.

Still, there were early signs that Beijing's shift to supporting growth may already be offering some cushion.

Real estate investment jumped 13.2 per cent in July on-year, the fastest in nearly two years and higher than June's 8.4 per cent rise, according to Reuters calculations.

New construction starts jumped 32.4 per cent on-year, likely buoyed by stronger home sales, improved funding conditions for cash-strapped developers and the government's heavy spending on public housing.

The Politburo said last month it would achieve this year's target of around 6.5 per cent, despite risks to growth. Last year, it expanded 6.9 per cent.


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A version of this article appeared in the print edition of The Straits Times on August 15, 2018, with the headline China's economy cools further amid trade spat. Subscribe