China factory output disappoints, more stimulus seen


New Member
Mar 31, 2010
(Reuters) - China's factory output growth slowed unexpectedly in July to its weakest in more than three years, underlining stiff global headwinds that may prompt policymakers to take more action to keep growth on track to meet a 7.5 percent annual target.

Retail sales and fixed asset investment also missed market forecasts in official data released in Thursday, increasing expectations that Beijing will act to support an economy that has seen growth sliding for six straight quarters.

Annual consumer inflation, meanwhile, fell to a 30-month low last month, suggesting that the central bank has ample scope to ease policy further after cutting interest rates in June and July.

"We think the weakness will be more stubborn than people had expected," said Li Wei, China economist at Standard Chartered Bank in Shanghai. "My view is that political rhetoric is losing its effectiveness in boosting confidence and you need actual actions to boost growth."

Expectations of more stimulus measures in response to the data boosted riskier assets, with Asian shares rising to a three-month high and the commodity-sensitive Australian dollar testing a 4-1/2-month peak.

Apart from lowering interest rates, Beijing has also cut the amount of cash that banks must hold as reserves (RRR) to free up an estimated 1.2 trillion yuan ($191 billion) for lending in a series of moves since November 2011.

President Hu Jintao and Premier Wen Jiabao have promised to step up policy "fine tuning" in the second half of the year to support the economy.

The central bank is widely expected to continue its gradual policy easing in the coming months to support growth, despite its recent warning that inflation may pick up after August.

The benchmark Reuters poll last month showed analysts expected the central bank to deliver its next interest rate cut in the third quarter and two more cuts in banks' reserve requirement ratio by the end of the year.

"Policy measures the government has taken so far are not enough to stabilize growth and policy support should be stepped up," said Wang Jun, economist at China Centre for International Economic Exchanges (CCIEE), a government think-tank in Beijing.

"On monetary policy, the central bank should cut banks' reserve requirement ratio (RRR) as quickly as possible."


China's economy is struggling to escape from the effects of the euro zone debt crisis and a sluggish U.S. recovery that are keeping global growth at a low ebb, the main factor that pushed China's new export orders in July into their steepest fall in eight months.

Weak property investment is hurting economic growth despite a modest pick-up in sales and prices, while falling factory-gate prices cut into corporate earnings and limit capital spending.

The central government has been fast-tracking some infrastructure projects, but its efforts have sparked fears of overcapacity.

Growth-obsessed local authorities have been rolling out some investment projects in recent weeks, but their ability to fund them remains in doubt given more than 10 trillion yuan in local debt - a legacy of the massive stimulus unleashed in 2008/09.

Policy stimulus could give only a limited boost to the economy in the absence of a global recovery, analysts say.

"Economic growth in the third quarter is likely to remain sluggish. Growth may show some improvement from September," said Zhang Hanya, a researcher with the National Development and Reform Commission, the country's top planning agency.


China's industrial output growth slowed to 9.2 percent year-on-year in July, its weakest since May 2009, down from 9.5 percent in June and below the 9.8 percent forecast in a Reuters poll.

Annual growth in fixed-asset investment, in the likes of real estate, roads and bridges, came in at 20.4 percent in January-to-July, unchanged from the January-to-June period and just below the 20.5 percent forecast.

Growth of retail sales, the biggest driver of the economy's expansion in the first quarter, eased to 13.1 percent, short of the forecast of 13.7 percent.

Economic growth has been sliding since the beginning of 2011, reaching 7.6 percent in the second quarter, the weakest pace since the global financial crisis.

Analysts polled before the data had expected to see a pick-up in growth in the third quarter to 7.9 percent and full-year growth of 8 percent, above the official target.

Barclays Capital cut its 2012 China GDP growth forecast to 7.9 percent from 8.1 percent after Thursday's data.

Annual consumer inflation eased to 1.8 percent in July from 2.2 percent in June, pulling back further from a three-year high last July of 6.5 percent. Economists polled by Reuters had forecast inflation to ease to 1.7 percent in July.

"This number gives more room for policy easing," said Zhang Zhiwei, chief China economist at Nomura in Hong Kong.

"It is now pretty clear that CPI will likely be below the official 4 percent target for the year, so the policy focus for the government can stay clearly on growth."

Consumer prices edged up 0.1 percent in July from the previous month, compared to expectations of a 0.1 percent drop.

July's data showed that producer prices fell in July by 2.9 percent from a year earlier, a sharper decline than the 2.5 percent forecast and the steepest fall since October 2009. It marked a fifth straight month of falling producer prices.


Latest Replies

Global Defence