China economy slows

China data issued Wednesday showed industrial production and fixed-asset investment growth eased in July, indicating the country’s economic activity continued to slow, and consumer price inflation picked up because of a spike in food prices.

The slowdown in output and investment growth come as the effect of stimulus measures fades and reflect government clamp-downs on property market speculation and polluting, energy intensive industries.

“China’s growth is slowing, but we see no sign of a hard landing,” Bank of America-Merrill Lynch economist Lu Ting said in a note.

However, other economists disagreed, reflecting the lack of consensus on how worrisome the slowdown in those indicators is for broader economic growth, and how Beijing should respond.

“The main message from the data is that slowing demand could be adding to growth worries, which could possibly trigger the government to take a more accommodative policy stance,” said ING economist Prakash Sakpal.

Industrial production growth slowed to 13.4% in July from 13.7% in June, but came in slightly above economists’ expectations of a 13.2% rise.

Urban fixed-asset investment in the January-July period rose 24.9% from a year earlier, down from the 25.5% rise in the January-June period. Economists had expected a 25.3% rise.

China’s consumer price index rose 3.3% from a year earlier in July, up from June’s 2.9% rise, because of higher food prices amid severe flooding in many areas across the country.

The rise in consumer prices was slightly below economists’ expectations of a 3.4% rise. Analysts said they don’t see great cause for alarm as the rise is mostly the result of one-off factors and they expect inflation pressures to decline in the months ahead.

“Inflation is always a cause for some concern, but there’s nothing to suggest CPI will rise above 4% in the near term,” said Royal Bank of Scotland economist Ben Simpfendorfer, adding he expects the CPI’s rise to be near the central government’s 3% target for the remainder of the year.

Food prices, a major component of the consumer price index, rose 6.8% from a year earlier in July, up from the 5.7% rise in June. Non-food prices rose 1.6%, unchanged from June’s 1.6% rise.

Underscoring receding inflationary pressures, the producer price index rose 4.8% in July from a year earlier, down from June’s 6.4% rise and well below economist expectations of a 5.4% rise.

National Bureau of Statistics spokesman Sheng Laiyun welcomed the slowdown in industrial output and fixed-asset investment, saying it is the result of China’s macroeconomic policies. A slowdown in economic growth will be good for China’s economic restructuring and will help prevent economic overheating, he said at a news briefing.

Other economists said they were concerned about the rapid slowdown in loan growth in July and said it may be necessary for China to loosen its full-year lending target of 7.5 trillion yuan ($110.8 million), in effect an economy-wide credit quota.

Financial institutions in China extended 532.8 billion yuan worth of new yuan loans in July, central bank data showed Wednesday, bringing the total for the January-July period to 69% of the government’s annual target.

The lending total for July was below the 600 billion yuan forecast in a poll of economists and lower than the 603.4 billion yuan worth of new loans extended in June.

Data also showed China’s broadest measure of money supply, or M2, was up 17.6% at the end of July from a year earlier, down from the June’s 18.5% rise and below expectations, which were for flat growth compared with June.

Goldman Sachs economist Yu Song said the slowdown in money supply and credit growth is alarming.

“We believe this level of broad money supply growth is clearly too restrictive as it will put more downward pressure on domestic demand growth in the near future,” he said in a note.

The People’s Bank of China has said it won’t change its 7.5 trillion yuan new loan target for 2010, but Yu said he feels it may be necessary.

Source: WSJ

Leave A Reply

Your email address will not be published.