Date
23 August 2017
Industrial output grew at a steady 6.5 percent pace in May from a year earlier, defying expectations for a slight softening. Photo: Reuters
Industrial output grew at a steady 6.5 percent pace in May from a year earlier, defying expectations for a slight softening. Photo: Reuters

China’s economy holds up in May but investment cooling

China’s economy generally remained on solid footing in May, but tighter monetary policy, a cooling housing market and slowing investment reinforced views that it will gradually lose momentum in coming months, Reuters reports.

Still, with half a year left to go, Beijing is expected to handily meet its annual 6.5 percent economic growth target without too many bumps, good news for President Xi Jinping ahead of a major political leadership reshuffle later this year.

Slower fixed asset investment growth in May and a sharp deceleration in housing starts seen in data on Wednesday point to some of the cooling economists have been expecting, though stable growth in factory output and retail sales, along with a pickup in exports, are cushioning the impact so far, the news agency said.

But a rise in inventories in the industrial sector and weaker producer price inflation will drag on growth ahead, said Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong.

“The first half of this year was a very happy period for China in the sense that we had that wonderful increase in output prices,” said Kuijs, referring in part to a construction boom which boosted demand and profits of structurally unhealthy sectors such as steel.

The extent to which China’s growth slows may depend on how much more monetary tightening the central bank and regulators want to impose in the second half of the year, Kuijs said.

After rolling out a slew of measures early in 2017 ranging from short-term interest rate increases to a clampdown on riskier forms of lending and shadow banking, authorities have appeared to pause in recent weeks as the government looks to ensure political and financial market stability heading into the Communist Party Congress in autumn.

With slower nominal growth going into next year, “the willingness to tighten significantly (further) on the monetary side will be pretty low”, Kuijs said.

Industrial output grew at a steady 6.5 percent pace in May from a year earlier, defying expectations for a slight softening, as a government infrastructure spree continues to boost demand for building materials from cement to steel.

But rising inventories are a risk. In April, growth in industrial inventories picked up to over 10 percent.

Weaker growth in fixed asset investment – at 8.6 percent for January through May – was led by a slowdown in the property sector.

While housing sales rose by an unexpectedly solid 10 percent, growth in new construction starts almost halved to 5.2 percent in May, according to Reuters calculations.

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