China’s weakening economic momentum failed to pick up as sluggish confidence weighs on consumption and investment, putting the government’s annual growth target at risk.
Fixed-asset investment unexpectedly slowed to 3.6% in the first seven months of the year, while consumption remained weak despite a seasonal uptick last month. Capital spending by state-owned enterprises slowed to 6.3% in the first seven months from 6.8% in the first half, while that of private firms stagnated from a year ago.
Infrastructure investment has been one of the major engines of domestic demand, which has been trailing the production this year, said David Qu, of Bloomberg Economics, adding the expected slowdown there posed a warning sign.
“That means an engine of China’s economy on the demand side is also moderating and losing steam,” he added. “It tells us that maybe one day, the weakness in the demand-side will return to bite the other side.”
The latest snapshot of the $17 trillion economy shows domestic demand is barely benefiting from recent government efforts to boost consumption and rectify imbalances in China’s recovery. Instead, the economy continues to operate at two-speeds with manufacturing spearheading growth.
Industrial output rising 5.1% in July from a year ago, the National Bureau of Statistics said Thursday, down from June’s increase of 5.3%. The urban jobless rate reached 5.2%, likely reflecting a wave of graduates entering the summer market.
While retail sales climbed 2.7% in July, slightly better than forecast, they likely benefited from a more favorable base of comparison and the summer holiday season, according to Serena Zhou, senior China economist at Mizuho Securities Asia Ltd.
“We believe the economy faces a significant threat from self-fulfilling deflation expectations,” she added. “The government’s top priority should be to break this downward spiral early with more assertive measures.”
Stocks reacted positively. The onshore benchmark CSI 300 trading 1.1% higher, set for the best day in two weeks, while the Hang Sang gauge advanced as much as 1%. The yield on the one-year sovereign bond rose 10 basis points to 2.19%, while the onshore yuan weakened 0.2% against the dollar.
Long-term relief for the consumer is unlikely so long as China’s real estate slump squeezes household budgets. Though the government rolled out its biggest rescue package for the property sector in May, it has yet to help the market bottom out quicker.
“The economy’s momentum slowed,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. “This has posed more challenges to the goal of achieving around 5% growth this year, and policymakers would see this too.”
The economy was “overall stable” in July with some improvement, the NBS said in a statement. “There’s an increasing negative impact from the changing external environment, while domestic demand remains insufficient. The switch from old to new growth drivers is causing temporary pains.”
An absence of a meaningful recovery in the economy is likely to amplify calls for additional policy stimulus as Beijing chases its annual growth target of around 5%. China’s top leaders already signaled a more supportive stance toward growth at a recent Politburo meeting by vowing to shift their focus to consumption, though the broad pledges have been met with skepticism in the market.
Figures released earlier this month already provided evidence of a weak start to the third quarter. China’s export growth unexpectedly slowed in July as overseas orders began to soften, while the country’s bank loans to the real economy contracted for the first time in 19 years.
The economy’s performance marked “a weak start” to the second half, said Xing Zhaopeng, senior China strategist at Australia & New Zealand Banking Group Ltd. “Demand side weakness remains stubborn.”