China holds fire on rates, posts 'shockingly weak' activity growth

File photo showing the central business district in Beijing, on April 11, 2018. China's fixed-asset investment growth cooled to 6.1 per cent in January-May from the same period a year earlier.
File photo showing the central business district in Beijing, on April 11, 2018. China's fixed-asset investment growth cooled to 6.1 per cent in January-May from the same period a year earlier.PHOTO: AFP

BEIJING (REUTERS) - China's economy is finally starting to cool under the weight of a multi-year crackdown on riskier lending that is pushing up borrowing costs for companies and consumers, with data on Thursday (June 14) pointing to a broad slowdown in activity in May.

China's central bank sparked concerns over the health of the economy earlier in the day when it left short-term interest rates unchanged, surprising markets which had expected it to follow a hike by the US Federal Reserve, as it has tended to do.

Industrial output, investment and retail sales all grew less than expected, offsetting upbeat trade data and suggesting further weakness ahead if Beijing perseveres with its crackdowns on factory pollution, questionable local government projects and shadow banking.

The data, which showed the slowest investment growth in over 22 years, "was all shockingly weak by Chinese standards," economists at Rabobank said, adding that the readings may explain the central bank's decision to keep rates on hold.

"Get ready for headlines talking about Chinese deleveraging hitting the economy - except it isn't even deleveraging yet! China is walking more of a tightrope than markets believe - and the data underline that issue clearly," they said.

Chinese policymakers have been walking a fine line between rolling out measures to curb financial risks and pollution and tapping the brakes so hard that business activity slows sharply.

Much of their effort so far has focused on the banking sector - explaining why China's headline GDP growth has been so consistently solid.

But there are growing signs in official data and unofficial gauges that the regulatory crackdown is starting to filter through into the broader economy, with companies complaining it is harder and costlier to secure financing and a growing number of firms defaulting on bonds.

China's fixed-asset investment growth cooled to 6.1 per cent in January-May from the same period a year earlier, the slowest pace since at least February 1996.

Analysts polled by Reuters had expected investment growth to remain steady at 7.0 per cent in the first five months of the year, the same pace as in January-April.

May industrial output rose 6.8 per cent from a year earlier, versus estimates for a touch less than April's 7 percent.

Retail sales grew 8.5 per cent in May, the slowest pace since June 2003, according to Reuters calculations. Analysts had expected a pick-up to 9.6 per cent from 9.4 per cent in April.

The slowdown in retail sales growth was due to seasonal factors and consumers delaying purchases, while the easing in fixed-asset investment growth was mainly because of weaker infrastructure investment, Mao Shengyong, a spokesman at the National Bureau of Statistics, told reporters.

Mao said China's economy will maintain relatively sound momentum in the second half, and he was confident it will grow around 6.5 per cent for the full-year, in line with the government's target and Reuters polls.

But the writing was on the wall for slower activity after data last week showed new loans by Chinese unexpectedly fell in May from April, while overall credit growth also cooled.

Trade was pretty much the lone bright spot in May data, with exports topping forecasts, but analysts expect that growth driver may also lose momentum in coming months.

Chinese exporters have been front-loading their shipments due to changes in the international trade environment, commerce ministry spokesman Gao Feng said at a regular press briefing on Thursday, amid rising trade tensions with the United States.

A third round of talks between China and the United States early this month ended with few signs of progress, as Beijing issued a counter-warning that any trade and business deals reached with Washington would be void if the United States implemented tariffs.

On Friday, Washington is expected to release a list of some US$50 billion worth of Chinese goods that will be subject to a 25 percent tariff.


Analysts forecasting an economic cool-down are largely basing their assumptions on slowing local government spending and real estate investment in response to regulators' campaign to reduce financial risks and curb a rapid build-up in debt.

"Deleveraging has had a large impact on the real economy, but current economic growth still remains relatively steady, so I'm not sure whether monetary and financial policies will change overnight in response," said Yang Yewei, analyst at Southwest Securities.

"But I think after July and August the downward pressure in the economy may increase significantly and policy adjustments will happen then." Growth in infrastructure spending, a powerful economic driver last year, slowed to 9.4 per cent in the first five months, compared with a rise of 12.4 per cent in January-April.

Property investment growth slowed to 9.8 per cent in May from 10.2 per cent in April, according to Reuters calculations.

But a construction boom which began in 2016 may still be going strong. Data from the China Construction Machinery Association showed the sales of excavators doubled in May from a year earlier.

Indeed, property sales and construction starts both picked up in May, with analysts saying cash-starved developers may be rushing more projects to market to reduce their financing pressures.

Private sector investment, which accounts for about 60 per cent of overall investment in China, also cooled. It expanded 8.1 per cent in January-May versus 8.4 per cent in the first four months.

China's economy will likely expand by around 6.7 per cent in the second quarter from a year earlier, the State Information Center (SIC), an official think tank, said recently.

That would mark only a fractional easing from 6.8 per cent growth reported by Beijing in each of the three preceding quarters.

The think tank also expected China's industrial output to grow about 6.6 per cent in April-June from a year earlier, with fixed-asset investment growth of around 7.2 percent and retail sales seen rising about 10 per cent.