China GDP growth slips to 6.7% in second quarter

Deleveraging campaign hits infrastructure spending as impact of trade war looms

Gabriel Wildau in Hong Kong

Not so fast: China's economic growth is slowing as domestic demand moderates © Bloomberg

China’s economy expanded by 6.7 per cent in the second quarter, its slowest pace since 2016, as the impact of an aggressive deleveraging campaign curtailed investment in infrastructure.

The pace of annual expansion announced on Monday is still above the government’s target of “about 6.5 per cent” growth for the year, but the slowdown comes as Beijing’s trade war with the US adds to headwinds from slowing domestic demand. Gross domestic product had grown at 6.8 per cent in the previous three quarters.

A campaign to tackle excessive debt and financial risk that began early last year, following almost a decade of heavy credit stimulus, has weighed on fixed-asset investment, a pillar of overall growth. Such spending grew only 6 per cent in the first half of the year, a record low.

“A main reason for the slowdown is that infrastructure investment began to slow down in the first quarter as the government was trying to control local government debt,” said Haibin Zhu, chief China economist at JPMorgan Chase in Hong Kong.

“The good news is that there is space to provide more fiscal support through tax cuts and higher infrastructure investment. We expect they will move along these lines.” 

Tighter monetary policy has also dragged on growth. Data released on Friday showed that M2 money supply and overall credit growth — including bank lending and off-balance-sheet lending — both grew at their slowest pace ever in June. The impact of new rules aimed at curbing risks from shadow banking has led to a sharp contraction in lending by non-bank institutions.

In response to signs of a slowdown, the central bank has loosened policy in recent weeks, cutting the amount of reserves the country’s banks are required to keep on deposit. Analysts believe that credit probably bottomed out in June and will accelerate in the next few months.

Mao Shengyong, a spokesman for the National Bureau of Statistics, said the impact of US-China trade conflict on China’s economy would be “relatively limited”.

But on the eve of a top-level summit with the EU on Monday, where China’s president Xi Jinping is expected to try to project a united front against US-led trade protectionism, Mr Mao also emphasised that any negative impact would extend beyond China.

“This trade friction that the US has unilaterally kicked up will influence both countries. But now the world economy has deeply integrated supply chains. It’s a global distribution, so many countries will be affected,” he said.

The impact of the trade war is not yet evident in China’s published economic data. Chinese customs data released on Friday showed that China’s monthly bilateral trade surplus with the US was the highest on record in June at $29bn. Overall exports rose 11.3 per cent last month, beating expectations.

But trade conflict may begin to appear in macro data in the next few months, after the US and China each imposed $34bn in tariffs beginning on July 6. That will sharpen the trade-offs facing policymakers between growth and deleveraging.

“We expect growth in [the second half] to be challenged by the slow credit growth and softer real estate activity. Also, the intensifying trade conflict with the US will start to weigh on growth,” Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong, wrote on Monday.

“But China’s most recent export data suggests that overall global demand momentum remains solid for now.”

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