China’s stability falters as factory output slows


13/08/2016 10:15 AST

China’s recent economic stabilisation faltered in July as factory output, retail sales and investment all slowed, while the broadest measure of new credit rose the least in two years. All main indicators released on Friday missed economist estimates in Bloomberg surveys: Industrial production rose 6 per cent in July from a year earlier, less than the projected 6.2 per cent gain. Retail sales climbed 10.2 per cent last month versus the estimate for 10.5 per cent. Fixed-asset investment increased 8.1 per cent in the first seven months of the year, compared with a projection for 8.9 per cent growth. Aggregate financing was a two-year low of 487.9 billion yuan ($73.4 billion) in July, less than half of the median estimate of 1 trillion yuan in Bloomberg’s survey new yuan loans stood at 463.6 billion yuan, also the slowest pace since July 2014 and less than the projected 850 billion yuan increase The broad M2 money supply rose 10.2 per cent, the weakest gain since April 2015

“With this downward trend it’s hard to meet the government’s 6.5 per cent minimum target,” said Wang Tao, chief China economist at UBS Group AG in Hong Kong, adding that policy makers are now concerned about rising leverage. “If this slowdown becomes sharper, the government will switch back to prioritising stabilising growth.”

Policy makers face a choice: boost demand with cheap credit that risks undermining financial stability, or curb debt expansion even if that slows the economy. Friday’s data suggests the second option is being pursued for now. With tepid global demand and domestic businesses reluctant to invest, the government has increased fiscal support this year, even as it held off from further benchmark interest-rate reductions.

The yield on China’s benchmark 10-year government bond dropped to 2.665 per cent, the lowest since 2006, after the People’s Bank of China released the money supply data.

Underscoring the economy’s dependence on a property market recovery, long-term loans to households — the majority of which are mortgages — increased more than the total new bank loans in July for the first time since 2007.

Property development investment in the first seven months of the year rose 5.3 per cent, while the value of property sales during the period soared 39.8 per cent, the National Bureau of Statistics said. Home sales value rose 41.2 per cent while new property construction increased 13.7 per cent.

Bloomberg’s monthly gross domestic product tracker slipped to 6.94 per cent in July, from 7.13 per cent a month earlier. Economists expect the official growth pace, at 6.7 per cent in the first and second quarters, will slow in the third quarter and again in the fourth.

“The real economy has weak demand for financing or investment, and banks are also tightening credit on risk concerns,” said Liu Dongliang, a senior analyst at China Merchants Bank Co in Shenzhen.

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