Once strong supports to growth, now softening
Fixed asset investment (FAI) continued to lose momentum, slowing to 3.6% yoy year to date (ytd) in July, down from 3.9% in June. The growth for July alone is estimated at an annual 1.9%, a sharp decline from 3.6% in June. The primary drag was a significant slowdown in infrastructure investment, which rose by only 2.0% yoy in July, compared to 4.6% in June. Although investment in the manufacturing sector also edged down slightly, it remained relatively robust, growing by 8.3% in July, from 9.3% in June. Additionally, there was a notable contraction in investment in education, healthcare and culture, sports and entertainment in July, with declines of -8.6%, -15.6%, and -6.9%, respectively.
Industrial production (IP) eased in July, dropping to 5.1% from 5.3% in June, mirroring the weaker Purchasing Managers’ Index (PMI) observed earlier in the month. High-tech manufacturing continued its strong performance, increasing by 10.0% in July, up from 8.8% in June. Production in the computer, communications, and electrical equipment manufacturing sectors saw a significant uptick, rising by 14.3% in July, compared to 11.3% the previous month. However, production in automotive manufacturing slowed further, with growth declining to 4.4% in July from 6.8% in June, dragging on headline IP for the first time since May 2022.
China’s economy managed to grow by 5.0% in the first half of the year, largely due to the support from non-property investment, which bolstered the supply side. However, FAI and IP have been decelerating in recent months, putting this year’s growth target in question. The sluggish issuance of local government bonds may explain the weakness in FAI, particularly in infrastructure, amid tight project scrutiny. The buoyant FAI in the manufacturing sector could be attributed to the recent equipment upgrading programme. While IP slowed less sharply compared to investment, concerns are mounting. With domestic demand growth remaining bleak, and external demand likely to be curbed by trade frictions and the fading impact of front-loading, the impact of rising excess production risks exacerbating overcapacity in the Chinese economy, adding further disflationary pressure.
Better reading in a single month does not change the bleak picture in domestic demand
Retail sales picked up slightly in July, growing by 2.7% yoy and 0.4% month on month (mom) (June: 2.0% yoy, -0.1% mom). While sales of goods rose to 2.7% yoy from 1.5% in June, catering sales slowed to 3.0% from 5.4% previously. Home appliances, which were supported by the recent trade-in programme, saw declines narrow to -2.4% in July, from -7.6% in June. Automobile sales fell by 4.9%, slightly better than June’s 6.2% drop. Electric car sales, backed by the trade-in programme, continued to outperform, rising by 36.9% in July.
Despite the slight improvement in retail sales in July, the pessimistic outlook lingers. Although Beijing has shifted its policy focus towards restoring consumer demand since July, it may not be strong or direct enough to boost actual activity.