BEIJING (June 14): 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 bank 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 retail sales 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 Rabobank 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! China is walking more of a tightrope than markets believe — and the data underline that issue clearly," they said.
China 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 banking 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% 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% in January-May from the same period a year earlier, the slowest pace since at least February 1996.
Analysts polled by Reuters had expected it to remain steady at 7.0%, the same as in January-April.
Growth in infrastructure spending, a powerful economic driver last year, slowed to 9.4% in the first five months, from 12.4% in January-April.
"The biggest drag on FAI here is infrastructure investment," said senior China economist Betty Wang at ANZ.
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% from a year earlier, versus estimates for a small dip from April's 7%.
Retail sales grew 8.5% in May, the slowest since June 2003, according to Reuters calculations. Analysts had expected a slight pick-up to 9.6%.
The slowdown was due to seasonal factors and consumers delaying purchases, Mao Shengyong, a spokesman at the National Bureau of Statistics, told reporters.
Auto sales dipped 1%. China's auto industry said on Monday that some car buyers 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% for the full year, in line with the government's target and Reuters 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% of overall investment in China, also cooled.
TRADE A BRIGHT SPOT BUT US THREATS LOOM
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 United States.
Chinese exporters have been front-loading their shipments due to changes in the international trade environment, commerce ministry spokesman Gao Feng said on Thursday.
A third round of Sino-US trade talks early this month ended with few signs of progress, as Beijing warned that any trade and business deals reached with Washington would be void if it implemented tariffs.
On Friday, Washington is expected to release a list of some US$50 billion worth of Chinese goods that will be subject to a 25% tariff. But it is not clear when US President Donald Trump would activate them, if he chooses to do so.
GRADUAL SLOWDOWN SEEN, NOT HARD LANDING
Following Thursday's data, ING cut its estimate for China's second-quarter GDP growth 6.7% from 6.8%, bringing it more in step with other forecasters.
Oxford Economics and Nomura kept their views unchanged at 6.4% and 6.6%, respectively. Commerz Bank also held steady, saying its 6.4% 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 China Construction Machinery Association 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, analyst at Southwest Securities.
"But I think after July and August the downward pressure in the economy may increase significantly and policy adjustments will happen then."