China’s Economic Activity Slows in July as Reforms Take Effect – Reuters

BEIJING (Reuters) – Economic activity in China showed signs of slowing down in July, with investment experiencing its slowest growth rate since the beginning of the century. The world’s second-largest economy is facing challenges as it restructures its aging industrial sectors.

Data released on Friday indicated weaker-than-expected performance in investment, lending, retail sales, and factory production, reinforcing the belief that the government may need to implement further stimulus measures to achieve its ambitious growth targets for the year.

According to Jing Li, an economist at HSBC, persistent external headwinds, weak business sentiment, and a cooling property market necessitate that policymakers accelerate both policy easing and reforms.

The prospects for increased stimulus rallied investor confidence, leading to China’s blue-chip CSI300 Index closing at its highest level since early January.

For the period from January to July, fixed-asset investment in China grew by 8.1 percent, marking the weakest increase since December 1999 and a decline from 9 percent observed in January to June. Analysts had projected a rise of 8.8 percent.

The decline in investment was largely driven by a 22.9 percent drop in mining, which suggests that the government’s efforts to reduce production in older industrial sectors are having an effect.

With slowing investment and net exports, analysts anticipate that the government may prioritize fiscal policies over interest rate cuts to boost overall growth.

Investor sentiment remains cautious amid significant reforms in the state-owned enterprise sector. Private sector investment, which constitutes roughly 60 percent of total investment, grew by 2.1 percent compared to 2.8 percent in the first half of the year. Conversely, investment growth from state-owned enterprises declined to 21.8 percent in the January to July period, down from 23.5 percent.

The real estate sector, previously a bright spot in the economy, also indicated challenges as real estate investment growth slowed to 5.3 percent from 6.1 percent.

The trend of reduced investment was further highlighted by recent bank lending numbers. The central bank reported on Friday that new yuan loans dropped to 463.6 billion yuan in July, the lowest figure in two years and significantly below the 800 billion yuan forecast by analysts. This decline is attributed to a decrease in credit demand from private businesses and stricter property investment regulations impacting mortgage demand.

Sheng Laiyun, a spokesperson for the National Bureau of Statistics, noted that while companies in emerging sectors are eager to invest, many private firms continue to face hurdles in accessing financing.

Retail sales growth softened to 10.2 percent in July, down from a previous 10.6 percent increase, while factory output registered a 6.0 percent rise from the same month the previous year, falling short of the 6.1 percent expected by analysts.

The slowdown in industrial production can be attributed to the ongoing restructuring of traditional industries, compounded by unusually high summer temperatures and recent flooding, as per comments from NBS analyst Jiang.

Concerns about insufficient demand over upcoming years are causing reluctance among businesses to invest, particularly in capital expenditure, which is a major driver of the observed investment decline, explained Zhou Hao, Senior Emerging Markets Economist at Commerzbank in Singapore.

Total social financing, a broad measure reflecting credit and liquidity conditions within the economy, fell markedly to 487.9 billion yuan in July, down from 1.63 trillion yuan in June.

Additionally, data concerning the money supply indicated that businesses are choosing to hold onto cash rather than reinvest, raising fears of a potential “liquidity trap” forming in China. The growth of M1 money supply, which includes cash and short-term deposits, climbed to 25.4 percent year-on-year, while M2 money supply, which incorporates longer-term deposits, grew by just 10.2 percent, representing its weakest performance in 15 months.