China July industrial output growth falls to 17-year low as trade war escalates, retail sales disappoint

Employee works at a factory of the Zhejiang Headway Communication Equipment Co in Huzhou

BEIJING (Reuters) – China reported a raft of unexpectedly weak July data on Wednesday, including a surprise drop in industrial output growth to a more than 17-year low, underlining widening economic cracks as the trade war with the United States intensifies.

Industrial output grew 4.8% in July from a year earlier, data from the National Bureau of Statistics showed on Wednesday, lower than the most bearish forecast in a Reuters poll.

Analysts had forecast industrial output growth would slow to 5.8%, from June’s 6.3% growth, amid weakened demand at home and abroad. The United States had sharply raised tariffs on a large share of its Chinese imports in May.

Despite more than a year of growth boosting measures, Wednesday’s data showed China’s domestic demand remains sluggish, with gloomy July factory surveys, stubbornly soft imports and weaker-than-expected bank lending data released in recent days reinforcing views that Beijing needs roll out more stimulus soon to support the economy.

Retail sales growth was also weaker than the most pessimistic forecast, after a jump in July that many analysts had predicted would be temporary.

Retail sales rose 7.6% in July from a year earlier, compared with 9.8% in June and analysts’ expectations of 8.6%.

Fixed-asset investment rose 5.7% in January-July from the same period last year, lagging expectations of a 5.8% gain, the same as Jan-June.

But investment readings by sector showed a more marked loss of momentum in key sectors at the start of the third quarter.

Private sector fixed-asset investment, which accounts for about 60% of the country’s total investment, grew 5.4% in January-July, compared with a 5.7% rise in the first sixth months of 2019.

Property investment grew 10.6% in the first seven months of the 2019 on-year, slowing from 10.9% in Jan-June. The sector has been one of the few bright spots in China’s economy.

China’s economy has been slow to respond to a flurry of support measures rolled out since last year, with growth cooling to a near 30-year low in the second quarter. Business confidence also remains shaky, weighing on investment.

Investors fear a longer and costlier trade war between the world’s two largest economies could trigger a global recession.

Already, the tariff row has hit world trade, investment and corporate profits. It is also pushing some Chinese manufacturers to move capacity to neighbouring countries and rebuild supply chains outside of China.

China’s industry ministry said in late July that the country would need “arduous efforts” to achieve 2019’s industrial output growth target of 5.5% to 6.0%, citing trade protectionism pressures.

Analysts say Beijing will need to deliver more stimulus to prevent a deeper downturn and to help stabilise growth.

That view was reinforced earlier this month when a brief ceasefire in the trade war was shattered after U.S President Donald Trump vowed to impose a 10% tariff on $300 billion of Chinese imports from Sept. 1.

Such a move would extend levies to effectively all of the goods China sells to the United States. But in an apparent effort to blunt their impact on U.S. holiday sales, Trump on Tuesday delayed duties on some Chinese imports including cellphones, laptops and other consumer goods.

Sources told Reuters recently that more aggressive action such as interest rate cuts are a last resort, as it could fuel a sharper build-up in debt.

Despite prodding from Beijing, several bankers have told Reuters they have little appetite to lend to smaller companies due to the uncertain economic outlook, the trade war and a years-long drive to purge risks from the financial system. Some firms also say banks are sharply reducing credit lines.

(Reporting by Huizhong Wu and Stella Qiu; Editing by Kim Coghill)