- China’s industrial production and retail sales growth are slowing
- July data complements the recent set of weak indicators and points to a sluggish recovery
- The central bank cuts interest rates to boost growth
- Real estate investment extends decline for 17th straight month
- Some analysts are warning of a downward spiral in the economy if support is not raised
BEIJING, Aug 15 (Reuters) – A flurry of Chinese data on Tuesday highlighted mounting pressures on the economy from multiple quarters, prompting Beijing to cut interest rates to boost the economy. But analysts say more support is needed to revive growth.
China’s central bank unexpectedly cut a set of key interest rates ahead of the release of a series of July data, and cut more interest rates a few hours later. This underscores the rapid fading of the economic recovery following the COVID crisis that has rocked financial markets worldwide.
Data released Tuesday by the National Bureau of Statistics (NBS), which complements a series of weak indicators from last week, showed retail sales, industrial production and investment growing slower than expected – a hint at the engines of the economy and consumption in the second-largest The world economy was severely underfunded.
In addition, China suspended the release of youth unemployment data, which hit a record 21.3% in June.
“All major indicators of activity fell short of consensus expectations in July, with most either flat or barely increasing month-on-month,” said Julian Evans-Pritchard, economist at Capital Economics.
“And with financial woes at developers like Country Garden likely to weigh on the real estate market in the near term, there is a real risk that the economy will slide into recession unless policy support is stepped up soon.”
Analysts at Nomura were also optimistic about China’s economic prospects.
“We believe that the Chinese economy is facing an imminent downward spiral and the worst is yet to come, and this morning’s rate cut will be of limited help,” they said.
Most economists see downside risk for Chinese growth but do not expect a recession.
Industrial production grew 3.7% yoy, slowing from 4.4% in June, NBS data showed, and below expectations of a 4.4% analyst poll by Reuters.
Retail sales, a measure of consumption, rose 2.5% from a 3.1% rise in June, missing analysts’ forecasts of 4.5% growth despite the summer travel season.
It was the slowest growth since December 2022 and shows the major challenge authorities face in trying to make consumption the key driver of future economic growth.
MORE PLEASURE
Asian equities stagnated at monthly lows, the yuan hit a 9-month low, while the dollar remained broadly stable after weak Chinese data and recent monetary easing.
After the first rate cuts, China’s major state banks were seen selling US dollars and buying yuan to stem the currency’s rapid depreciation, said three people with direct knowledge of the matter. Government bond yields fell to a three-year low and benchmark equity indices fell.
Market observers said record-breaking credit growth and rising risks of deflation required further monetary easing to stem the slowdown, while risk of default by some real estate developers and a default by a private wealth manager also weighed on market confidence.
Nie Wen, an economist at Hwabao Trust, expects special bonds to be introduced urgently and said the likelihood of a near-term reduction in the reserve requirement ratio (RRR) is relatively high.
Policymakers released a range of stimulus measures last month, from boosting car and home appliance consumption to easing some property restrictions and pledging to support the private sector as the post-COVID recovery has picked up rapidly since the second quarter has lost momentum.
The hospitality sector, which benefited from the COVID reopening, saw slower sales growth in July than in June. Private sector investment fell by 0.5% in the first seven months and continued the decline of 0.2% in the first half of 2023.
Reuters graphics
STRUCTURAL PAIN
The ongoing strain in the real estate sector, mounting local government debt pressures, high youth unemployment rates and slowing foreign demand remain major obstacles to promoting a sustained economic recovery.
China is experiencing a painful transition to a less debt-driven, less property-centric and more consumer-centric economy, said Robert Carnell, head of Asia Pacific research at ING.
“We will continue to see weak macroeconomic data for the foreseeable future. It’s a necessary part of the adjustment, and far better than reviving the debt-fueled real estate model that previously fueled growth. But we need to lower our expectations for China’s growth.”
Other data on Tuesday showed that fixed asset investment grew 3.4% in the first seven months of 2023 compared to the same period last year, while an increase of 3.8% was expected. In the January-June period, it grew by 3.8%.
Investments in the real estate sector fell 8.5% year-on-year from January to July after falling 7.9% in January and June, continuing the decline for the 17th straight month.
The nationwide unemployment rate rose slightly to 5.3% from 5.2% in June, according to the survey. Among OECD members, the average unemployment rate was 4.8%, with youth unemployment hovering around 10%.
China has set its growth target at around 5% for 2023, but Nomura analysts warn the country could miss the target again like last year.
“We also see greater downside risk to our 4.9% year-on-year growth forecast for the third and fourth quarters, and it is increasingly likely that annual GDP growth will miss the 5.0% mark this year. “
($1 = 7.2838 Chinese Yuan Renminbi)
Additional reporting by Liangping Gao and Albee Zhang; Edited by Shri Navaratnam and Ed Osmond
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