China’s Slowing Growth Momentum Requires Further Easing

The author is ANZ greater China chief economist Liu Li-Gang

China’s real activity indicators slowed in July. Industrial production rose 9.0% year-on-year in July, lower than market consensus and the previous reading of 9.2%. Electricity production growth softened to 3.3% in July, from 5.7% in June.

Retail sales also missed market estimates, gaining 12.2% in July and 0.2 percentage point lower than the previous month.

Fixed asset investment surprised the market on the downside, increasing 17.0% year-on-year from January to July, compared with 17.3% in the first half of this year. We believe that the slowdown of fixed asset investment is largely dragged by the property sector.

Even strong exports appear to have shown some cracks. Export delivery value, a sub-item under industrial production, slowed to 7.2% in July from 8.5% in June, and port throughput data also weakened in July.

In addition, government spending also slowed somewhat, which may drag fixed asset investment in the near term.

July’s disappointing real sector activity data, plus a sharp drop in monetary data, suggest growth momentum has decelerated again.

If the 7.5% growth target remains legally binding, China will have to further ease monetary policy. We believe a bank reserve requirement ratio (RRR) cut is imminent in order to restore confidence.

(The article has been edited for clarity)

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