No respite for Chinese officials as economy shows new signs of weakness
A recent string of dismal indicators have dulled expectations for China's economic performance in July, in an ominous sign for the rest of 2024 and pointing to the need for more stimulus measures beyond plastering over pain points in the world's second-largest economy.
Calls for more growth boosting measures for the $19 trillion economy have dogged officials after a widely expected post-pandemic recovery failed to materialise in 2023. Still, the government is targeting economic growth of around 5% this year.
The latest data point to a rocky start to the second half. On Tuesday, central bank data showed July new bank loans plunged to a 15-year low, while other key gauges showed export growth slowed and factory activity slumped as manufacturers grapple with tepid domestic demand.
The economy had already grown more slowly than expected in the second quarter, expanding 4.7% from a year earlier, as wary consumers remained reluctant to spend and trade ties with major markets became more tense, suggesting a period of prolonged sluggishness is increasingly likely.
"The market consensus will move to the left side of the 'around 5%' growth target, since the economy slowed in July and a forceful plan to support the economy seems to be missing," said Xu Tianchen, senior economist at the Economist Intelligence Unit, which has kept its growth forecast at 4.7% since March.
On Thursday, China will release a raft of activity data. Economists polled by Reuters poll expect that retail sales grew 2.6% year-on-year last month, versus 2.0% in June, while industrial output was forecast to have grown more slowly and investment growth levelled off.
Officials will also release the latest reading on new home prices, which fell at the fasted clip in nine years in June despite a host of support measures aimed at luring back buyers and stemming a protracted property crisis.
Credit data this week showed household loans, mostly mortgages, contracted 210 billion yuan ($29.37 billion) in July, compared with a rise of 570.9 billion in June.
One of the main reasons people are not spending in China is 70% of household wealth is held in real estate, a sector which had long been a major growth driver.
EXPORTS
One of the few bright spots this year - exports - has so far failed to spark a broader economic recovery, not least because manufacturers have had to slash prices to find buyers overseas amid weak domestic demand.
And there are signs that global demand is slowing. The official factory managers' survey for July showed producers received fewer export orders for a third month.
"It all hinges on exports," said Alicia Garcia Herrero, chief economist for the Asia-Pacific at Natixis. "Exports are stagnant, (and) we have already seen Thailand announcing import tariffs, and, of course Turkey, Europe, and the U.S."
"If we see exports growing negatively, then I think we need to lower our projections for 2024, maybe to 4.2%, something like that."
To be sure, after a surprise reduction in a short-term rate in July, many economists are pencilling in more interest rate cuts in China later this year, especially if the U.S. Federal Reserve starts slashing borrowing costs from September. But with domestic demand so weak and the outlook unclear, households and businesses are in no rush to borrow.
"There is definitely a chance officials will hurry up to announce a more clear plan to stimulate domestic consumption since they seem particularly concerned about poor domestic demand recently," the EIU's Xu said.
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China's factory output disappoints, dashing hopes for speedy recovery
Employees work at the production line of aluminium rolls at a factory in Zouping, Shandong province, China.
China's factory output growth slowed and missed expectations in July, adding to a series of indicators that show the world's second-largest economy is struggling to kick into a higher gear, even with recent government support.
Industrial output grew 5.1% from a year earlier, National Bureau of Statistics (NBS) data showed, slowing from the 5.3% pace in June and below expectations for a 5.2% increase in a Reuters poll of analysts.
In an upbeat contrast, the NBS' monthly activity indicators showed retail sales, a gauge of consumption, rose 2.7% in July, quickening from a 2.0% increase in June and beating expectations for growth of 2.6%, a sign efforts to boost household spending were getting some traction.
However, analysts warn the broader outlook is still highly challenging for policymakers, suggesting more stimulus measures will be needed.
"The data shows that the economy has gotten off to a weak start in the second half of the year, and it is expected that the probability of replacing MLF with a RRR cut will increase, but key to maintaining 5% economic growth remains the arrival of fiscal spending," said ANZ China market economist Xing Zhaopeng. He was referring to the People's Bank of China's medium-term lending facility and reserve requirement ratio.
On Thursday, the central bank injected cash through a short-term bond instrument and said it would conduct an MLF rollover later this month as it extends liquidity support to the financial system.
Chinese leaders last month signalled that they would give greater consideration to suggestions they turn to a new playbook and focus growth boosting efforts at consumers, rather than more funnelling more funds into infrastructure and manufacturing.
Calls for more growth boosting measures for the $19 trillion economy have dogged officials ever since a widely expected post-pandemic recovery failed to materialise in 2022.
While the government is still targetting growth of around 5% this year, analysts consider it increasingly likely that the world's production powerhouse has entered a prolonged economic malaise similar to Japan in the 1990s.
Fixed asset investment expanded 3.6% in the first seven months of 2024 year-on-year, but also missed expectations for a 3.9% rise and also slowed from the 3.9% growth in the January to June period.
China's central bank at a meeting earlier this month said it would step up financial support to the broader economy and efforts would be directed more at consumers to spur consumption.
But with domestic demand so weak and the outlook unclear, households and businesses are in no rush to borrow.
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China new loans hit 15-year low in July, more policy steps expected
China's bank lending tumbled more than expected in July, hitting the lowest in nearly 15 years, dragged down by tepid credit demand and seasonal factors and raising expectations that the central bank may dole out more easing steps.
Chinese banks extended 260 billion yuan ($36.28 billion) in new yuan loans in July, down nearly 88% from the previous month and also missing analysts' forecasts, according to data released by the People's Bank of China on Tuesday.
Analysts polled by Reuters had predicted new yuan loans would come in at 450 billion yuan last month, noting that July is traditionally a weak period for credit expansion.
After the data, some analysts said they expected the PBOC to cut interest rates further, but it may have to tread cautiously for fear of fuelling capital flight and hurting the yuan currency.
"July's credit data is indeed very weak," said Zhou Shilei, director of the global financial market department at UOB (China). "The effect of previous interest rate cuts is not significant, and there are expectations for further rate cuts."
Last month's new yuan loans dipped from June's 2.13 trillion yuan and compared with 345.9 billion yuan a year earlier.
Banks extended 13.53 trillion yuan in new yuan loans in the first seven months of this year, the PBOC said.
The central bank did not provide a single month breakdown for July but Reuters calculated the figure based on the bank's January-July data, compared with January-June.
Household loans, mostly mortgages, contracted 210 billion yuan in July, compared with a rise of 570.9 billion yuan in June, according to Reuters calculations based on the PBOC data. Corporate loans dropped to 130 billion yuan from 1.63 trillion yuan in June.
The PBOC's survey of bankers published last week suggested loan demand weakened significantly in the second quarter, with the overall loan demand index falling to 55.1% from 71.5% in the previous quarter.
Central bank chief Pan Gongsheng has said a slowdown in China's credit expansion is natural due to factors such as economic shifts and less lending to the property sector and local government financing vehicles.
China's economic growth missed forecasts in the second quarter, while July economic indicators also offered little cheer as export growth slowed and consumer inflation got a boost only due to weather disruptions to food supplies.
MORE RATE CUTS EXCEPTED
The PBOC pledged to guide credit to grow reasonably and steadily lower companies' financing and household credit costs, the bank said in its second-quarter monetary policy implementation report published last week.
At a meeting earlier this month to discuss policies for the second half of 2024, the PBOC said it would step up financial support to the broader economy and efforts would be directed more at consumers to spur consumption.
To bolster growth, the PBOC unexpectedly conducted a medium-term lending facility operation on July 25 and cut the interest rate, while five of China's major state-owned banks on the same day cut deposit rates to cushion a hit to their already record low margins.
"With private credit demand still lacklustre, the PBOC’s recent rate cuts aren’t significant enough to drive much of a recovery," Capital Economics said in a note.
"We’re only expecting a further 20bps of cuts to the loan prime rate this year, which won’t be sufficient to drive a sustained resurgence in credit demand."
Outstanding yuan loan growth slowed to 8.7% from a year earlier, compared with 8.8% in June. Analysts had expected an 8.8% gain.
There were signs of steadying in some key money gauges.
Last month, broad M2 money supply rose 6.3% versus a year earlier, beating the 6.1% forecast in a Reuters poll and a record low of 6.2% in June.
Annual growth of outstanding total social financing, a broad measure of credit and liquidity in the economy, sped up to 8.2% from 8.1% in June.
In July, total social financing fell to 770 billion yuan, compared with forecasts of 1.1 trillion yuan, and 3.3 trillion yuan in June.
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