MNI ANALYSIS: China Economy Under Pressure, FAI At Record-Low

By Iris Ouyang

     BEIJING (MNI) - China's economy appeared under pressure in July, as

fixed-asset investment fell to an historical low, despite the property market

offering some support to overall economic activity.

     The below expectations performance reflects further downward risks for the

world's second largest economy amid an economic slowdown and an ongoing trade

war with the U.S.

     --FIXED-ASSET INVESTMENT

     Fixed-asset investment (FAI) continued its downward track, growing just

5.5% y/y, the lowest since the data was first compiled in 1992, data released

Tuesday by China's National Bureau of Statistics (NBS) showed. The FAI growth

was below the 6% median estimate of 18 forecasters surveyed by MNI.

     The record-low FAI growth was largely due to a slowing of the service

sector, down to 6% from 6.8%, with slowing infrastructure investment growth a

major drag. Core infrastructure investment rose 5.7% in the January-July period,

compared with 7.3% in Jan-June.

     --PROPERTY INVESTMENT

     But the property market -- the brightest spot for economic activity in July

-- helped offset some of the negative impacts of other slowing fixed-asset

investment.

     Year-to-date property investment grew 10.2% in July, up from 9.7% in the

Jan-June period, recording the fourth highest year-to-date growth so far this

year. It was supported by accelerated investment in all three subcategories --

residential housing, business buildings and property units for business

operations.

     Strong property sales from Jan to July, rising 4.2% to 899.9 million square

meters (up from 3.3% in the first six months) helped drive the

better-than-expected property investment. Property sales by value also increased

sharply, up 14.4% to the highest level since the 15.3% in the Jan-Feb period.

     Improved property developers' funding conditions also boosted property

investment, with funds raised by property companies up 6.4% to more than CNY9.33

trillion, 1.8 percentage points higher than in the Jan-June period.

     --SLOWING CONSUMPTION

     Retail sales, however, showed disappointing results in July, indicating

domestic demand lacks momentum though the Chinese government has been making

efforts in boosting consumption.

     Retail sales grew 8.8% to CNY3.0734 trillion, slowing from 9% in June. In

the first seven months, it grew 9.3% to CNY21.0752 trillion, compared with the

9.4% growth from January to June. The reading shows slowing of the economy has

weighed on wage growth and consumers' confidence, which further impacts retail

sales growth.

     --INDUSTRIAL OUTPUT

     Slowing of both infrastructure investment and domestic demand are seen

weighing on industrial output, which rose 6% in July, unchanged on the month-ago

period. From January to July, it rose 6.6% y/y, down 0.1 percentage point from

Jan-June.

     The slight drop in industrial production from the energy supply sector

offset increases by mining and manufacturing industries, leading to the flat

reading in July.

     Among the specific industrial sectors, vehicle manufacturing saw a slump in

output to 6.3% from 14%, reflecting weaker domestic demand for cars in July.

Transportation manufacturing (such as railway, ships and aircrafts) declined

1.9% in July, compared with the 10.9% growth in June.

     --OUTLOOK

     Looking ahead, infrastructure investment will be a key factor to gauge

China's economic growth for the remainder of this year. As China's government

recently underlined, it will implement a more proactive fiscal policy, meaning

infrastructure investment could rebound in later this year.

     As China is still entangled in a trade dispute with the U.S., domestic

consumption would be further boosted by government policies. But current robust

growth of the property market may not be sustainable as the government stresses

credit will not be "pumped" into the sector, even China is gradually easing

monetary policy.

--MNI Beijing Bureau; +86 (10) 8532-5998; email: iris.ouyang@marketnews.com

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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