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 Unexpectedly weak growth in investment, retail sales and bank
lending in July all pointed to growing vulnerabilities in the
world's second-largest economy.
The biggest surprise from Wednesday's data deluge came from credit
and financing figures that showed the amount of cash flowing into
the world's second-largest economy tumbled to a near six-year low in
July of 273.1 billion yuan ($44.34 billion), about one seventh of
that in June.
The central bank downplayed the drop, saying that the plunge in
lending was a natural pull-back after an unusual surge in June,
while conceding loan demand was slowing. Analysts said the unusually
large drop may also have come on the back of a crackdown on
high-risk loans and commodity financing in the wake of a fraud
scandal at the port of Qingdao.
But the dour news rattled some economists, who worried that the
numbers signaled not only weaker loan demand in the property sector
but growing caution on the part of banks to lend in general as
credit risks increase.
The mood contrasted sharply with that in June, when data showed the
economy appeared to be regaining traction after a weak start to the
year.
"The reading on investment, the most important driver of the
economy, missed market expectations again," said Hu Yuexiao, an
analyst at Shanghai Securities.
"Add to that the remarkable decline in credit growth in the
corporate sector and it could suggest an end to the economic rebound
(seen) in the second quarter."
Hu said he expected authorities to further loosen monetary policy
with a possible interest rate cut, whilst trying to stoke investment
growth by slashing red-tape and wooing private capital.
Helped by a steady stream of government stimulus, China's economy
rebounded slightly to 7.5 percent in the second quarter - in line
with the government's full-year target - from an 18-month low of 7.4
percent in the first three months.
But buffeted by a property downturn that has hurt domestic spending,
the economy appears to be sputtering again. Questions about the
durability of the economic recovery flared last week when surveys on
the services sector showed unexpected weakness, linked largely to
the housing market downturn.
PROPERTY DRAG
Accounting for roughly 15 percent of China's economy, the housing
sector has faltered this year as prices and sales turned south,
leading many analysts to warn that it poses the biggest risk to
broader growth.
Wednesday's data showed the slowdown may have deepened. Housing
sales skidded 16.3 percent in July compared with a year ago in terms
of floor space, Reuters calculations showed, a sharp increase from
June's 0.2 annual fall.
New construction fell 12.8 percent in January-July as cash-strapped
developers tried to clear huge inventories of unsold homes. But
discounts and other sweeteners have failed to attract many buyers,
who expect further price declines.
While easier access to loans is seen as one key to preventing a
sharp correction in the property market, a survey released by
Standard Chartered last week indicated many developers were finding
it tougher to access funding through banks or trust loans.
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They also said borrowing costs were rising, and most felt banks did
not appear more willing to extend loans to first-time home buyers
despite encouragement from the central bank.
Analysts said the wobbly real estate market had dampened overall
investment growth, which was up 17 percent in the first seven months
compared with the year-ago period, a level unseen in over 12 years.
"The sluggishness of the property market will continue to hang over
the domestic economy," said Louis Kuijs, an economist at RBS. "We
expect the government to continue taking and encouraging measures to
support growth."
Economists disagree on whether China will need to resort to more
aggressive policy loosening measures, such as cutting interest rates
or the reserve requirement ratio for banks to shore up growth.
A Reuters poll last month showed analysts were split on whether
China would cut the reserve requirement ratio this year, though half
of those surveyed thought that a 50-basis-point reduction was
possible before March.
Analysts who oppose further policy loosening, including the
International Monetary Fund, argue that China's economy is already
awash in credit, and authorities must refrain from adding more cash
to the system unless growth crumbles.
To be sure, the latest data pointed to some pockets of resilience.
Industrial output rose 9 percent in July from a year earlier, the
National Bureau of Statistics said, slowing from June's 9.2 percent
gain but in line with market expectations.
Data last week showed exports grew nearly twice as much as expected,
though imports unexpectedly fell, pointing to soft domestic demand.
Retail sales, a key gauge of domestic consumption, rose 12.2 percent
in July from a year earlier, slowing from June's 12.4 percent pace.
"The activity figures are basically lower than market expectations,
especially the investment data, which is mainly due to the weak
showing in the property market," said Zhou Hao, an economist at ANZ
in Shanghai.
"I would say the government will have to further relax policies to
deliver an annual growth rate of 7.5 percent."
(Reporting by China economics team; Editing by Kim Coghill)
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