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Chinese Economy Starts to Feel Tariff Impact

China’s business activities faltered in July in the first official data to reflect the impact of U.S. tariffs, adding to signs that trade tensions have started to pinch economic growth.

Official surveys of factories and service providers pointed to sluggish domestic demand. Companies that had been frontloading shipments to stay ahead of higher tariffs may have slowed production and investment, economists say.

Earlier this month, the Trump administration imposed 25% tariffs on $34 billion worth of Chinese goods, which led to immediate retaliation on U.S. products. The White House has threatened additional levies on exports, further hurting business sentiment.

“Impacts from the tariffs started to kick in this month,” said Liu Xuezhi, an economist at Bank of Communications.

The official manufacturing purchasing managers’ index fell to a five-month low of 51.2 from June’s 51.5, data released by the National Bureau of Statistics showed Tuesday. July’s reading came in slightly lower than economists’ expectations.

The import subindex of the official PMI slipped to a 23-month low, while the export subindex held steady thanks to a weaker yuan, said Julian Evans-Pritchard, an economist at Capital Economics.

In addition to trade friction, disruptions caused by weather conditions, such as extreme heat and typhoons, also contributed to the slowdown, according to Zhao Qinghe, an analyst with the bureau.

Both output and demand weakened in July. A subindex measuring production dropped to 53.0 from 53.6, while the new orders index fell to 52.3 from 53.2.

Despite July’s fall, the headline index has stayed above the 50 mark, which separates an expansion of activity from a contraction, for nearly two years.

An official measure of activity outside China’s factory gates, also released Tuesday, declined to an 11-month low in July, as cooling manufacturing and construction activities weighed on the sector.

“Today’s data are consistent with our view that China’s economy is on track to slow further this quarter and next, triggering additional policy easing,” Mr. Evans-Pritchard said.

Beijing has stepped up its efforts to spur economic growth in recent weeks, a sign that the government is becoming more worried about slowing growth as trade tensions rise.

The country’s cabinet, the State Council, last week encouraged local governments to quickly tap the bond market. The central bank lent more than 500 billion yuan ($73 billion) to banks, a push to get them to lend and the largest one-time amount since such injections started in 2014.

Those stimulus measures could boost infrastructure investment in the coming months, partly offsetting an expected slowdown in exports–a main driver of growth for China last year, said Mr. Liu, of the Bank of Communications.

China’s efforts to tame debt weighed on domestic demand, and recent economic-policy easing measures may boost sentiment over the medium term but could come at a cost, said Betty Wang, an economist at ANZ.

“While this is likely to lift domestic sentiment over the medium term, we are mindful of whether China will shift back to pump-priming the economy,” Ms. Wang said.
Source: Dow Jones

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