Chinese economy softens on property downturn despite stimulus measures

China’s economy showed further signs of softening in July despite a burst of government stimulus measures, suggesting more policy support may be needed to keep growth on track as a property downturn worsens.

Unexpectedly weak growth in investment, retail sales and bank lending in July all pointed to growing vulnerabilities in the world’s second-largest economy.

The biggest surprise from yesterday’s data deluge came from credit and financing figures that showed the amount of cash flowing into the world’s second-largest economy tumbled to a near six-year low in July of 273.1bn yuan — about one seventh of that in June.

China’s central bank downplayed the drop, saying the plunge in lending was a natural pullback after an unusual surge in June, while conceding loan demand was slowing.

Analysts said the unusually large drop may also have come on the back of a crackdown on high-risk loans and commodity financing in the wake of a fraud scandal at the port of Qingdao. But the news rattled some economists, who worried the numbers signalled not only weaker loan demand in the property sector but growing caution on the part of banks to lend, as credit risks increase.

“The reading on investment, the most important driver of the economy, missed market expectations again,” said Hu Yuexiao, an analyst at Shanghai Securities.

“Add to that the remarkable decline in credit growth in the corporate sector and it could suggest an end to the economic rebound in the second quarter.”

Mr Hu said he expected authorities to further loosen monetary policy with a possible interest rate cut, whilst trying to stoke investment growth by slashing red-tape and wooing private capital.

Helped by a stream of government stimulus, the economy rebounded to 7.5% in the second quarter, in line with the government’s full-year target, from an 18-month low of 7.4% in the first three months.

— Reuters