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China holds fire on rates, posts 'shockingly weak' activity growth

Reuters  |  BEIJING 

By and Fang Cheng

BEIJING (Reuters) - China's economy is finally starting to cool under the weight of a multi-year crackdown on riskier lending that is pushing up borrowing costs for companies and consumers, with data on Thursday pointing to a broad slowdown in activity in May.

China's central sparked concerns over the health of the economy earlier in the day when it left short-term interest rates unchanged, surprising markets which had expected it to follow a hike by the Federal Reserve, as it has tended to do.

Industrial output, investment and all grew less than expected, suggesting further weakness ahead if Beijing perseveres with its crackdowns on pollution, questionable local government spending and off-balance sheet "shadow" financing.

The data, which showed the slowest investment growth in over 22 years, "was all shockingly weak by Chinese standards," economists at said, adding that the readings may explain the central bank's decision to keep rates on hold.

"Get ready for headlines talking about Chinese deleveraging hitting the economy - except it isn't even deleveraging yet! is walking more of a tightrope than markets believe - and the data underline that issue clearly," they said.

has been walking a fine line between rolling out measures to curb financial risks and pollution and tapping the brakes so hard that business activity slows sharply.

Much of their effort so far has focused on the sector rather than corporate debt reduction or deleveraging - possibly explaining why China's headline growth has been so surprisingly solid. GDP has expanded at a steady 6.8 percent for three straight quarters.

But official and unofficial gauges are now showing the regulatory crackdown is starting to filter through to the broader economy, with companies complaining it is harder to get financing and a growing number of firms defaulting on bonds.

China's fixed-asset investment (FAI) growth cooled to 6.1 percent in January-May from the same period a year earlier, the slowest pace since at least February 1996.

Analysts polled by had expected it to remain steady at 7.0 percent, the same as in January-April.

Growth in infrastructure spending, a last year, slowed to 9.4 percent in the first five months, from 12.4 percent in January-April.

"The biggest drag on FAI here is infrastructure investment," said senior at

But Wang noted there are still many infrastructure projects in the pipeline, and it is a relatively easy sector for the government to inject stimulus if it chooses.

"Sure, local governments are more restrained by the crackdown on debt, but if there is a very large downside risk to the economy, the government is fully capable of propping it up again."

May industrial output rose 6.8 percent from a year earlier, versus estimates for a small dip from April's 7 percent.


grew 8.5 percent in May, the slowest since June 2003, according to calculations. Analysts had expected a slight pick-up to 9.6 percent.

The slowdown was due to seasonal factors and consumers delaying purchases, Mao Shengyong, a at the National Bureau of Statistics, told reporters.

Auto sales dipped 1 percent. China's auto industry said on Monday that some were holding off on purchases, presumably until import tariffs are cut from July 1.

Mao said the economy will maintain relatively sound momentum in the second half, and was confident it will grow around 6.5 percent for the full year, in line with the government's target and polls.

But the writing is on the wall for slower activity in coming months after data early this week showed overall credit growth cooled.

Private sector investment, which accounts for about 60 percent of overall investment in China, also cooled.


Trade was one of the few bright spots in May data, but analysts expect exports may also lose momentum in coming months amid rising trade tensions with the

Chinese exporters have been front-loading their shipments due to changes in the international trade environment, said on Thursday.

A third round of Sino-U.S. trade talks early this month ended with few signs of progress, as Beijing warned that any trade and business deals reached with would be void if it implemented tariffs.

On Friday, is expected to release a list of some $50 billion worth of Chinese goods that will be subject to a 25 percent tariff. But it is not clear when U.S. would activate them, if he chooses to do so.


Following Thursday's data, ING cut its estimate for China's second-quarter GDP growth 6.7 percent from 6.8 percent, bringing it more in step with other forecasters.

and Nomura kept their views unchanged at 6.4 percent and 6.6 percent, respectively. also held steady, saying its 6.4 percent estimate is "already low".

While much of the May data was softer, readings also showed the key property sector was generally holding up, suggesting the economy will slow only a modest pace.

Property investment growth eased in May, but a construction boom which began in 2016 may still be going strong. Data from the showed the sales of excavators doubled in May from a year earlier.

Indeed, property sales and construction starts both picked up last month, with analysts saying cash-starved developers may be rushing out projects to reduce their financing pressures.

"Current economic growth still remains relatively steady, so I'm not sure whether monetary and financial policies will change overnight in response," said Yang Yewei, at

"But I think after July and August the downward pressure in the economy may increase significantly and policy adjustments will happen then."

(Reporting by and Cheng Fang; Additional reporting by and Stella Qiu; Writing by Ryan Woo; Editing by Kim Coghill)

(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)

First Published: Thu, June 14 2018. 12:04 IST