A grim routine has developed around China's monthly economic data: Beijing publishes numbers that surprise on the downside, analysts lower their growth forecasts and markets wait with bated breath for policy makers to respond with more stimulus measures.
While the Chinese economy is holding up far better than it did when the global financial crisis erupted in late 2008, the expectation was that it would be doing more than just holding up at this point in time. It was supposed to be in the midst of a full-fledged recovery.
Instead, a slowdown in industrial production, a plunge in annual export growth to 1 per cent in July and tepid bank lending all point to the recovery both being weaker and coming later than many investors had hoped.
"People tend to be too optimistic about how long it takes policy to affect the real economy, especially with the external headwinds," said Shuang Ding, an economist with Citi.
Barclays analysts said they had been highlighting two risks to their baseline forecast for a recovery in the second half of the year: more serious troubles in Europe and insufficient domestic policy support.
"The developments in July, on both the external and domestic fronts, suggest that both risks appear to be playing out," they wrote in a note to clients.
China shifted to a pro-growth policy stance at the start of June when it cut interest rates for the first time in nearly four years, following that up less than a month later with another rate cut.
There have also been signs of a "stimulus-lite" – a small burst of spending that would echo the much bigger cannons brought out in late 2008. Wen Jiabao, the premier, said early last month that investment was essential to stabilizing growth. Taking his cue, a series of local governments, from Changsha in central China to Guizhou in the south, have announced huge spending plans.
It was unrealistic to expect these moves to fuel an immediate rebound, but most analysts had counted on a stabilization by now. In that respect, one of the biggest disappointments of the July data was factory output: annual growth slowed from 9.5 per cent to 9.2 per cent, showing that industrial conditions were continuing to deteriorate.
"The government stimulus so far is still insufficient to counter the economic downturn," said Shen Jianguang, an economist with Mizuho Securities. "We believe more aggressive policy actions will be necessary to put the economy back on track."
A steep slide in exports has put even more pressure on Beijing. For the past five years, the Chinese economy has progressively reduced its reliance on exports, to the point that they are no longer seen as a growth engine for the country.
But they are still important, employing tens of millions of workers, and the government had hoped that they would help provide some cushion against flagging domestic demand. Instead, exports are at risk of becoming a big drag on the economy, slumping to 1 per cent annual growth in July, from 11.3 per cent in June, well short of expectations.
The big question now is whether the disappointments of July prompt Chinese policy makers to unveil more in the way of monetary easing and fiscal spending.
Some analysts believe that the central bank will act quickly, perhaps as soon as this weekend, to cut the portion of deposits that commercial banks must hold in reserve, making it easier for them to lend. A few believe that a third interest rate cut could also come soon or that bolder spending plans will be announced.
But it may not be that simple. With the ruling Communist party hammering out a once-in-a-decade leadership succession this year, the country's top leaders are more focused on politics than economics for the time being.
Song Yu, an economist with Goldman Sachs, was admirably honest in admitting the limits of his predictive powers at this juncture in the political cycle: the "level of policy uncertainties [is] much higher than usual".