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 While manufacturing appears to have picked up, thanks largely to
government support measures and a modest resurgence in exports, data
this week showed sudden and unexpected weakness in the services
sector.
The decline appeared linked to the cooling property market, which
may be facing a prolonged slump that could hurt related businesses
and dampen consumer confidence.
A Reuters poll of 30 economists shows factory output likely held
steady in July while overall investment growth ticked higher,
chiming with expectations that a flurry of pro-growth steps from
Beijing earlier this year is paying dividends.
Anecdotal evidence, however, suggests property investment, sales and
construction could show a seventh month of deterioration, suggesting
the sector will be an increasing drag on activity even if other
parts of the world's second largest economy are gaining traction.
"We expect the upcoming July data to show steady momentum in real
economic activity, on the back of the ongoing export recovery,
policy support, robust credit expansion and improving business
confidence," Wang Tao, an economist at UBS, said in a recent note to
clients.
Some economists are concerned that policy measures may only generate
a quick and temporary boost to factory activity before their effects
begin fading out later in the year, much like the trend seen in past
years when the government rolled out similar support measures.
But other economists played down such worries, saying that a single
month of data is far from enough to judge the health of the entire
services sector or whether consumers are starting to tighten their
purse strings.
"I think people might overplay this particular weak reading of
service PMIs in one particular month," said Helen Qiao, chief China
economist at Morgan Stanley in Hong Kong.
Indeed, economists in the latest poll expect retail sales grew 12.4
percent in July from a year earlier, the same pace as in June.
"I still believe that it is more likely to be a property index
caused issue and that will go away as the policy impact kicks in,"
Qiao added.
The poll showed that fixed-asset investment, a key driver of the
economy and also an important indicator to gauge the effect of
government measures, is forecast to have grown 17.4 percent in the
first seven months of 2014 from a year earlier, a touch higher than
17.3 percent rise in the first half.
Factory output likely grew by an annual 9.0 percent in July,
compared with 9.2 percent in June, mainly due to a higher comparison
base of a year ago, analysts said.
CONSISTENT POLICY
China's leaders have stressed that they would focus more on measures
targeted to help specific sectors in the second half of this year
instead of massive and more general stimulus spending.
Since April, Beijing has loosened policy by reducing the amount of
cash that some banks have to hold as reserves, instructing regional
governments to quicken their spending, and hastening the
construction of railways and public housing.
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A growing number of local governments, which earn a large chunk of
their revenues by selling state land, have also relaxed home
purchase restrictions to support the sector, while state-controlled
banks have revved up mortgage lending.
The property slowdown may last for at least a year, weighing on the
economy well into 2015, though a collapse is seen as unlikely if
local governments continue to relax controls and banks keep credit
ample, according to a Reuters poll last week.
That would reinforce expectations that Beijing will stick to more
modest support measures in coming months, unless conditions in the
property sector significantly worsen.
"Despite market excitement triggered by recent policy developments,
policy support has not and we think will not deviate significantly
in the coming months from the incremental pace seen thus far in the
current cycle," said Wang Tao at UBS.
Beijing will only relax nationwide property market controls as a
"last resort", though some regions will continue to ease such curbs,
she added.
Low inflation will continue to offer the government more room to
maneuver its monetary policy if needed.
Annual growth in the consumer price index was seen steady at 2.3
percent in July, way below the annual target of 3.5 percent, the
poll showed.
Factory-gate prices are expected to continue a downward trend,
though the pace of decline is forecast to ease to 0.9 percent in
July from 1.1 percent in June.
With questions surfacing over the health of domestic demand,
investors may pay even more attention than usual to trade data due
on Friday.
Exports in July likely grew 7.5 percent from a year ago, compared
with an increase of 7.2 percent in June, while import growth was
seen slowing to 3.0 percent from 5.5 percent in June.
That would produce a monthly trade surplus of $27 billion, down from
June's $31.6 billion.
The poll also showed banks likely extended 727.5 billion yuan
(US$118 billion) in new loans last month, slowing from June's 1.08
trillion yuan, while growth of M2 money supply is likely to have
dipped to 14.4 percent in July from a rise of 14.7 percent in June.
(1 US dollar = 6.1631 yuan)
(Reporting by Aileen Wang and Koh Gui Qing; Editing by Kim Coghill)
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