China's economy slows as intensifying trade war clouds outlook

Gross domestic product increased 6.7 per cent in the second quarter from a year earlier, the slowest pace since 2016

China's Premier Li Keqiang speaks during the China-EU Business Roundtable at the Great Hall of the People in Beijing on July 16, 2018. The European Union on July 16 called on the United States, China and Russia to work together to cool worsening global trade tensions, warning that they could spiral into violent "conflict and chaos." / AFP / POOL / Ng Han Guan

China’s economic expansion slowed in line with expectations, signaling broadly stable output as the trade conflict with the US intensifies.

Gross domestic product increased 6.7 per cent in the second quarter from a year earlier. That was the slowest pace since 2016 and down slightly from the 6.8 per cent pace in the previous quarter. Investment growth and industrial output also slowed in June.

Industrial output rose 6 per cent last month from a year earlier, versus the forecast of 6.5 per cent, the statistics office said. Retail sales increased 9 per cent in June, compared with the forecast 8.8 per cent while fixed-asset investment came in at 6 per cent in the first six months, the same as forecast.

The urban monthly surveyed unemployment rate stood at 4.8 per cent at end-June, according to the data.

The continued steady growth heading into the second half of the year provides support on two policy fronts: Withstanding the potential negative effects of higher barriers to trade with the US, and continuing with a multi-year campaign to control debt and clean-up the financial system. After an acceleration in 2017, the world’s second-largest economy is forecast to slow this year, with the government targeting expansion of 6.5 per cent.

"Stronger retail sales offset the decline of industrial production in June. Thanks to the new economy, China managed to sustain a stronger growth momentum," said Raymond Yeung, chief greater-China economist for Australia & New Zealand Banking Group in Hong Kong.

A separate report Friday showed that the amount of money lent via the shadow-banking sector declined by 691.7 billion yuan in June, the biggest net monthly drop on record, according to Bloomberg calculations based on the central bank’s data. The broadest measure of new credit expanded.


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The data for the first half of 2018 showed a "slowdown in investment growth caused by an obvious monetary tightening", as policy makers try to contain debt growth, said Peiqian Liu, Asia strategist at Natwest Markets in Singapore. That slowdown impacts industrial production and retail sales data, as the consumption index covers both household spending and government and enterprises-led expenditure, she said.

With the commencement of higher tariffs on trade with the US on this month and the threat of more on another $200 billion in goods trade on the horizon, China is faced with a stiff challenge politically and economically. Even so, the credit data indicate that officials are pressing ahead with efforts to curb off-balance-sheet lending, which could depress growth further later in the year.

China faced “extremely complicated and severe” domestic and external conditions in the first half of the year, the statistics authority said in a statement released with the data. There will be trade challenges in the second half, but property investment is likely to continue its rapid gains, and infrastructure investment will remain stable, according to the spokesman Mao Shengyong, speaking after the release.

Net trade continued to be a drag on growth, as while China runs a massive surplus in goods, once imports and the services trade is taken into account, the picture looks much more balanced.

The trade surplus with the US stood at $28.97bn, the highest in any month in data back to 1999. Exports climbed to $42.62bn, also a high, the customs administration said on Friday.
"The intensifying trade conflict with the US will start to weigh on growth," said Louis Kuijs, head of Asia Economics at Oxford Economics in Hong Kong. "Robust consumption -- it picked up pace in Q2, surprisingly -- will continue to act as a buffer. Thus, amid some further easing of the macro stance, we expect the slowdown in the second half to be modest."