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China’s Economy Shows Fresh Signs of Weakness

Chinese economic data on industrial output and investment published Friday added to evidence of a slowdown that some economists said risks breaching the government’s 6% bottom line for growth, unless there is more stimulus.

The data for May included two key pieces of Chinese gross domestic product: value-added industrial production, which rose 5.0% from a year earlier, and fixed-asset investment, up 5.6% during the first five months of the year. Both increases were slower than prior-month reports from the National Bureau of Statistics. Beijing has targeted GDP growth this year between 6.0% and 6.5%–either would be the slowest in a quarter-century.

The factory output number, the weakest since 1992, follows disappointing trade data published this week showing exports nearly flat and imports falling 8.5% in May. Loan expansion in the period lagged every other month this year.

Lost momentum for the world’s No. 2 economy reflects battered sentiment stemming from the Trump administration’s tariffs on Chinese exports and its efforts to contain the country’s technology sector. The U.S. pressure on trade exacerbates weakness associated with Beijing’s efforts until recently to cool economic activity to better control debt.

“It seems like all of China’s economic drivers are losing steam, from exports to property,” said Larry Hu, an economist at Macquarie Group in Hong Kong. “What’s a thorny issue for policy makers now is that their previous stimulus measures have failed to lift infrastructure investment, while at the same time its crucial property market is cooling.”

Home sales rose 8.9% in the first five months of 2019 from the same period last year, the government said Friday, compared with 10.6% in the first four months. Investment in commercial and residential real estate, meanwhile, recorded 11.2% growth in the first five months against 11.9% during the January-April span. Construction starts increased 10.5% in the first five months, likewise slower than four-month figure of 13.1%.

It was a more hopeful story with consumer consumption in May as retail sales bounced from a more than 16-year low in April to 8.6%. But analysts aren’t betting that Chinese consumers will arrest the slowdown, and instead expect the government to build more infrastructure.

Just this week, Beijing made it easier for municipalities to use the proceeds of bonds they issue to fund public works. After Friday’s data releases, the People’s Bank of China signaled a fresh effort to ease a credit crunch hitting private businesses by giving smaller banks new access to liquidity.

China’s leadership and the country’s state-run media have dismissed concerns about the country’s recent economic performance stemming from U.S. trade tensions. On Thursday, Premier Liu He said the government has “ample tools” to support the economy. And speaking on a conference panel on Friday, China’s recently retired central bank governor, Zhou Xiaochuan, said it is likely authorities will lower the yuan’s value if the trade fight with the U.S. continues, a move that might support exports by making them cheaper in other countries.

“China will have to introduce more fiscal stimulus to ensure it can reach the 6% bottom line of growth target this year,” said Iris Pang, an economist with ING Bank NV In March, the National People’s Congress approved a 2 trillion yuan ($288.95 billion) stimulus package that included tax and fee reductions that briefly appeared to improve business confidence.

After first quarterly growth figures including a 6.4% rise in GDP reported in April suggested the economy was holdings its own, several economic forecasters lifted their predictions for China’s economic performance in 2019, though still within the range set by Beijing.

Among the firms initially confident growth would be underpinned were economists at Australia and New Zealand Banking Group Ltd.

But on Friday, ANZ cut its 2019 forecast to 6.2%, from 6.4%, saying in a note that, “The economic data coming out of China over the past two months have not lived up to our expectations.” Betty Wang, an economist at ANZ explained that there was less infrastructure building than expected while the struggling car industry has recently dragged down industrial production.

Beijing has orchestrated heavy debt-funded spending on infrastructure to spur economic growth in the past, but there are risks to the strategy that will likely deter the government from repeating it, said Lu Zhengwei, an economist at Industrial Bank in Shanghai.

“The second quarter will be the bottom of the year, then things will be better,” said Mr. Lu. He said growth for the second quarter is likely to be around 6.3%, and targets 6.4% growth in the two final quarters of this year.
Source: Dow Jones

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