The Chinese government is expediting plans to invest billions of dollars in infrastructure projects as its economy shows signs of cooling further, with investment growth slowing to a record low and consumers turning more cautious.
With its trade war with the United States threatening to pile more pressure on China’s economy, Beijing on Tuesday reported downbeat economic data, rolled out a US$14-billion urban railway plan and pushed local governments to speed up issuance of special bonds for funding infrastructure projects.
Official data show fixed-asset investment expanded by a less-than-expected 5.5 per cent over the January-to-July period, a result of Beijing’s crackdown on lavish local government borrowing for projects to boost growth.
Industrial output also fell short of expectations, weighed down by pollution curbs and an uncertain trade outlook, adding to expectations that authorities will roll out more policy stimulus.
Since the trade war started, Beijing has shifted its focus to boosting domestic demand and is taking a more measured approach to curbing financial risks and debt, which has pushed up borrowing costs and numbers of defaults.
The Chinese Finance Ministry said local governments should accelerate issuance of special bonds for infrastructure projects over the next couple of months. Local governments are allowed to issue 1.35 trillion yuan ($256.5-billion) of such bonds this year.
In the past month, the government has promised to raise spending on railways and roads – its traditional approach when the economy slows – although it said investment will be more targeted.
The transit authority of the eastern city of Suzhou said China’s state planner has approved a US$14-billion expansion of its urban rail network. That followed approval for a similar project in a northeastern city.
The central bank is also pumping more money into the financial system and urging banks to offer more loans at cheaper rates to small businesses. New yuan loans exceeded expectations in July, in one of the few bright spots in the most recent data.
“Admittedly, infrastructure spending may soon bottom out given the recent shift toward a looser fiscal stance and monetary easing should eventually drive a turnaround in credit growth,” Julian Evans-Pritchard, senior China economist at Capital Economics, wrote in a note.
“However, these are unlikely to put a floor beneath economic growth until the middle of next year.”
Many analysts predict a steady stream of support measures in the coming months. The July data “is likely to prompt more policy support,” DBS of Singapore said in a report.
Weakening domestic demand
The pace of fixed-asset investment was the weakest on record going back to early 1996, according to Reuters Eikon data. Investment had been expected to grow 6.0 per cent in the first seven months of the year, steady from January-June.
For July, fixed-asset investment grew 3.0 per cent from a year earlier.
Retail sales also missed expectations. They rose 8.8 per cent in July from a year earlier, less than an expected 9.1 per cent and down from 9.0 per cent in June, despite a broad import-tax cut last month.
It was not clear if consumer reluctance was attributable to softening local conditions or worries about the country’s continuing trade war with the United States. A Reuters straw poll of Chinese consumers found nearly one in three want to stop buying U.S. products now and some are already boycotting them.
Industrial output rose 6.0 per cent in July, missing analysts’ estimates for 6.3 per cent and was unchanged from June.
U.S. tariffs have had little effect on China’s trade and inflation so far. However, business surveys point to weakening export orders, and there are concerns that a protracted battle could lead to a sharper Chinese slowdown than expected a few months ago.
China and the United States have imposed tariffs on each other’s goods and more begin next week, with few signs that either side is ready to compromise.
Some brighter spots
In one of the few encouraging spots in the data, private sector fixed-asset investment rose 8.8 per cent in January-July, up from 8.4 per cent in the first half. It accounts for about 60 per cent of overall investment in China.
But growth in infrastructure spending slowed to 5.7 per cent in the first seven months from 7.3 per cent.
Still, there were early signs that Beijing’s shift to supporting growth may already be having an effect.
Real estate investment jumped 13.2 per cent in July on year-over-year basis, the fastest in nearly two years and higher than June’s 8.4 per cent, according to Reuters calculations.
New construction starts jumped 32.4 per cent year-on-year, probably buoyed by stronger home sales, improved funding conditions for cash-strapped developers and the government’s heavy spending on public housing.
Infrastructure loans also rebounded sharply in July.
The Politburo said last month it would achieve this year’s GDP growth target of around 6.5 per cent, despite mounting risks. Last year the economy expanded 6.9 per cent.
Some China watchers fear Beijing is returning to debt-fuelled growth, undermining its push to reduce riskier lending and a mountain of debt.
But unless conditions deteriorate markedly, most economists believe Beijing will stick with its deleveraging campaign, albeit at a more cautious pace, as it waits to see how the trade dispute plays out.
On Monday, a financing vehicle created by a local government in the western Xinjiang region missed a coupon payment on 500 million yuan ($95-million) of short-term paper, an example of the strain caused by the deleveraging campaign.