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China’s May industrial output growth cools to 17-year low as trade war escalates

BEIJING

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China’s economy flashed more warning signs in May as the United States ramped up trade pressure, with industrial output growth unexpectedly slowing to a more than 17-year low and investment cooling, underlining a need for more stimulus.

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Despite a slew of support measures since last year, China’s economy is still struggling to get back on firmer footing, and investors fear a longer and costlier trade war between the world’s two largest economies could trigger a global recession.

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Industrial output grew 5.0 per cent in May from a year earlier, data from the National Bureau of Statistics showed on Friday, missing analysts’ expectations of 5.5 per cent and well below April’s 5.4 per cent.

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The reading was the weakest since early 2002, and exports were a major drag, showing only marginal growth.

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Fixed assets investment also grew less than expected, reinforcing expectations that Beijing will need to roll out more growth measures soon.

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Vice Premier Liu He on Thursday stoked expectations of more stimulus as the US-China trade dispute intensifies, urging regulators to do more to boost the economy and saying Beijing has plenty of policy tools it can use.

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“Fiscal policy measures could step up and there should be more structural and targeted easing in monetary policy,” said Wang Jun, Beijing-based chief economist at Zhongyuan Bank.

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“It’s necessary to cut reserve requirement ratios (RRRs) but we should be a bit cautious in cutting benchmark interest rates.” Real estate investment, a key economic driver, also showed signs of fatigue, with constructions starts slowing markedly and property sales falling the most since October 2017.

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“The slowdown in the real estate sector is concerning. We really need to keep an eye on its negative impact on growth,” economists at ANZ said in a note to clients, trimming its 2019 growth forecast for China to 6.2 per cent and 6 per cent for 2020.

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ANZ expects the central bank to cut banks’ reserve requirement ratios (RRR) by another 100 basis points (bps) this year, and cut the 7-day reverse repo rate by 5 bps in the third quarter.

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The People’s Bank of China (PBOC) has already cut RRR six times since early 2018 to free up more money for banks to lend.

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It has also injected large amounts of liquidity into the financial system and guided short-term interest rates lower.

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However, despite the worsening trade outlook, China watchers appear divided over whether the central bank will cut benchmark interest rates, as it repeatedly did in past downturns.

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Analysts believe policymakers are concerned that more aggressive easing could fuel debt risks and put more pressure on the yuan, which is weakening towards the psychologically important 7-per-dollar level, last seen during the global financial crisis.

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Beijing has relied more on fiscal stimulus to weather the latest downturn, including hundreds of billions of dollars in infrastructure spending and tax cuts for companies.

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But Friday’s data suggested domestic demand remains sluggish, adding to weaker-than-expected import and bank lending data over the last week and gloomy May factory surveys. Power generation last month grew just 0.2 per cent.

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Analysts say China is readying itself for a prolonged trade dispute, after both sides raised tariffs on each other’s goods last month and US President Donald Trump threatened more.

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But some investors are still holding out hope that Trump will meet Chinese counterpart Xi Jinping at a G20 summit later this month and at least agree to suspend further escalations, similar to a truce they reached at December’s G20 in Argentina.

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Investment disappoints

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The latest readings on China’s economy also showed fixed assets investment growth decelerated to 5.6 per cent in January-May from the same period a year earlier. Analysts had expected it to remain unchanged from 6.1 per cent in the first four months of the year.

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Private sector fixed assets investment, which accounts for about 60 per cent of total investment in China, also lost momentum. It rose 5.3 per cent, compared with a 5.5 per cent rise in the first four months of the year.

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The PBOC has repeatedly urged state-controlled banks to keep lending to cash-strapped smaller, private firms at lower rates, even if they are facing short-term financial difficulty, but average rates for companies and home buyers edged back up in the first quarter.

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Infrastructure investment grew 4.0 per cent, moderating from 4.4 per cent.

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While construction has picked up as Beijing ramps up spending on road, rail and port projects, some analysts have been puzzled by the slower-than-expected response.

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On Monday, China announced steps to give local governments more financing flexibility on special bonds so they can increase infrastructure spending.

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Property investment rose 9.5 per cent in May on-year, the slowest pace so far this year.

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Retail sales

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Retail sales bucked the downbeat trend, rising 8.6 per cent in May from a year earlier and picking up from a 7.2 per cent rise in April, which was a 16-year low.

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Analysts surveyed by Reuters had expected a rebound to 8.1 per cent, but some said it was likely due to higher inflation rather than any turnaround in weak consumer confidence.

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Earlier this week, China’s auto association reported the worst-ever monthly drop in sales in the world’s biggest vehicle market in May as the economy slowed and provinces implemented tougher emission standards.

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In one piece of encouraging news, nationwide unemployment readings were steady from April at 5 per cent, though analysts believe the actual jobless rate is likely much higher.

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