China growth slows to weakest in almost 30 years

Downturn underlines the pressure that Chinese policymakers face as they attempt to negotiate a deal with the US on trade

A container ship is docked at the Yangshan port in Shanghai, Thursday, March 29, 2018. China's Commerce Ministry called on Washington on Thursday to discard planned tariffs it warned might set off a chain reaction that could disrupt global trade and said Beijing will "fight to the end." (AP Photo)
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China’s economy slowed to the weakest pace since quarterly data began in 1992 amid the ongoing trade standoff with the US, while monthly indicators provided signs that a stabilisation is emerging.

Gross domestic product rose 6.2. per cent in the April-June period from a year earlier, below the 6.4 per cent expansion in the first quarter. In June, factory output and retail sales growth beat estimates, while investment in the first half of the year also gave further evidence that stimulus measures to curb the slowdown are feeding through.

Shares in Hong Kong and Shanghai pared declines as the activity data in retail and industrial production topped estimates, though indexes across the region remained lower.

The slowdown underlines the pressure that Chinese policymakers face as they attempt to negotiate a deal with the US on trade, while the economy takes another step down in the long-term deceleration from the heady expansion of the mid-2000s. Although Chinese negotiators are talking with US counterparts again, there is no certainty that a deal will be reached in time to prevent further economic damage.

“We continue to see the second-quarter growth slowing, but I think we are seeing the stabilization,” said Wang Tao, chief China economist at UBS in Hong Kong. “The central bank needs to be a bit more proactive” going forward with additional reserve-requirement ratio reductions if higher tariffs come in, she said.

Net exports contributed to 20.7 per cent to output growth in the first half, down from 22.8 per cent in the first quarter. Trade data released Friday in Beijing detailed the weak end to the second quarter, as exports and imports fell.

"Concerns over global growth slowdown and the persistence of US-China trade war would continue to cloud the economic outlook. In the domestic market, whether the rebound in retail sales growth is sustainable is still uncertain,” said David Qu and Qian Wan, Bloomberg Economics.

Fixed asset investment growth in the first half accelerated at private firms, whereas state companies eased back, a further sign that government efforts to funnel cash to the private sector may be bearing fruit.

For the manufacturing sector, investment accelerated a notch to 3 per cent in the first half, while infrastructure investment also picked up to 4.1 per cent.

Nominal GDP growth in second quarter picked up to about 8.1 per cent from 7.8 per cent in the previous three months, leading to a slightly higher GDP deflator at 1.9 per cent, according to Bloomberg calculations using official data. A higher GDP deflator can ease the pressure on corporate profits and government fiscal revenue growth.

Better-than-expected retail sales data also lend credence to the idea that stability will emerge in the second half of the year. While the data are volatile, faster growth in sales of consumer goods, household appliances and furniture also point to the modest recovery ongoing in the vital property sector.

The overall retail sales result was also driven by robust auto sales growth, though with heavy discounts attracting buyers in June economists remain cautious on whether that upturn can be sustained.

A fiscal stimulus plan including about two trillion yuan (Dh1.06tn) of tax cuts is slowly feeding through into the economy. The government has stepped up efforts recently, easing the rules for using government debt in some infrastructure projects and pledging to renovate hundreds of thousands of old buildings.

Amid concerns about emerging price bubbles and risks in the financial sector, officials are likely to keep the recovery in the property market tightly controlled. Property development investment slowed for a second month in June, dragging down the growth of newly started property construction and inventory.

Until now, China’s leadership is tolerating the continued deceleration in the economy while the official unemployment rate remains low, and monetary policy has remained supportive without flooding the financial system with cash. Further tweaks to cement any nascent stabilization could be announced following a meeting of top leaders this month.

“China’s economy in the third quarter may face more downward pressure,” said Larry Hu, head of Chinaeconomics at Macquarie Securities in Hong Kong. “There probably won’t be any obvious policy adjustment in July, but more possibilities of change in the fourth quarter.”