China looks to be slowing again as domestic economy runs out of puff

Chinese workers  unload a roll of tin plate at Baosteel plant on the outskirts of Shanghai.

China’s economy looks to pulling back into the slow lane after a range of data has shown a broad loss of momentum in domestic demand.

Key points:

  • Electricity, steel and cement production slowed in August
  • Front-loaded infrastructure spending from earlier in the year slows rapidly
  • Cooling retail sales centre on sectors linked to the property cycle

The key monthly readings on industrial production, infrastructure spending and retail sales in August were all weaker than the month before and below market expectations.

Industrial production showed a marked step-down with the output of key drivers such as electricity, steel and cement all slowing.

The manufacture of consumer items such as cars and mobile phones also fell.

Overall industrial production is now growing at its slowest pace since January, just before spending stimulus and easier credit conditions kicked in.

Softer export sales for industrial products didn’t help, but Capital Economics Julian Evans Pritchard said the main culprit was weaker domestic demand.

Fixed asset investment (FAI) — a proxy for infrastructure and property spending — expanded at an annual rate of 8.3 per cent during the first eight months of a year.

Stimulus wearing off

But taking into account the spurt in FAI earlier in the year, Mr Evans-Pritchard says the data implies a slowdown from 6.8 per cent annual growth in July to less than 5 per cent last month.

There was a slight pick-up in manufacturing and property investment, but that was more than outweighed by a pull-back in spending on big infrastructure projects.

The pace of retail sales slowed noticeably as well, particularly in the automotive sector, along with sales of products linked to the property cycle including furniture, decorating materials and whitegoods.

Mr Evans-Pritchard said the upshot is that both foreign and domestic demand appear to be softening.

“In particular, infrastructure spending has now begun to cool as the front-loading of fiscal spending this year means that local governments are now having to pair back their outlays,” he said.

“With tighter monetary conditions still weighing on credit growth, we expect a further slowdown in economic activity in coming quarters.”