China Growth Momentum Cools as Investment Slows

(Beijing) — China’s growth momentum continued to ease in May as investment gains in the key sectors of real estate and infrastructure weakened, although resilient retail sales and industrial output helped counter the slowdown.

Fixed-asset investment excluding rural households rose 8.6% year-on-year in the first five months of the year, down from an 8.9% pace in the January-through-April period, the National Bureau of Statistics said on Wednesday. That was below the median growth forecast of 8.8% in a Caixin survey of economists and the second straight monthly slowdown.

Industrial output rose by 6.5% year-on-year in May, the same pace as in April. Although electricity production grew at a slower pace of 5%, suggesting lower demand from heavy industry, the high-tech sector continued to outperform, with production jumping 11.3% year-on-year, and equipment manufacturing rising by 10.3%. Retail sales — which include expenditure by households, government departments and business and exclude spending on services — climbed 10.7% year-on-year in May, the same pace as in April, the NBS said.

“Economic growth has definitely weakened in the second quarter from the first three months of the year, although the deceleration was modest,” Rong Jing, a Beijing-based economist with BNP Paribus, told Caixin.

The slowdown in growth in property and infrastructure investment and evidence of destocking by some industries indicate that downward risks and pressure may increase in the second half of the year, she said. But the “bright spots” of an ongoing mild recovery in exports on the back of solid growth in Europe, the U.S. and emerging markets and “steady consumption” will help counter the moderation, she added.

Investment in the real estate sector rose by 8.8% year-on-year in the January-through-May period, down from 9.3% in the first four months of the year, and marking the first deceleration since the January-through-November period in 2016, NBS data showed. Growth in new housing starts rose by 15.1% in the first five months, down from 17.5% in the first four months and 18.1% in the first quarter.

Larry Hu, an analyst with Macquarie Capital Ltd. in Hong Kong, said that property was “heading to a down cycle” and would be the “biggest growth headwind for the next 18 months.” He said his calculations showed that growth in housing starts in May alone slumped to just 5.2% year-on-year from 10.1% in April, suggesting developers are becoming more cautious and facing more-stringent budget constraints, while mortgage rates have also been rising due to tighter liquidity in the interbank market.

Year-on-year growth in infrastructure investment, which is driven by government spending, eased to 20.9% in the January-through-May period from 23.3% in the first four months of the year, according to the NBS.

Rong of BNP Paribas attributed the softening to the central government’s crackdown on unscrupulous borrowing by local governments, and the crackdown limited their ability to fund infrastructure projects. Net financing by local government financing vehicles was negative in the first five months, meaning the entities were actually repaying debts, she said.

The cooling real estate market and slower growth in infrastructure has impacted production of construction materials, with output growth of steel falling to 1.8% in May from 4.9% in the previous month, while that of cement diving to 0.5% from 2.4%, NBS figures showed.

However, reflecting the recovery in external demand seen in the May trade figures released last week by the customs administration, the NBS data showed that the delivery value of exports by industrial companies grew 10.4% year-on-year in the January-through-May period, compared with a drop of 1.5% in the same period last year and a 0.4% increase for the full year 2016.

China, the world’s second-largest economy, had a strong start in 2017, with gross domestic product (GDP) expanding by 6.9% in the January-through-March period, the second straight quarterly acceleration, as the property sector recovered and the government encouraged infrastructure spending.

However, economists widely expect growth to trend down for the rest of the year and into 2018 as the government continues to implement policies to rein in housing prices and tightens regulations on shadow banking to stop risky practices in the financial industry that could threaten the country’s financial stability.

But if economic growth shows signs of weakening so much that it threatens the achievement of the government’s 2017 GDP growth target of “around 6.5% or higher if possible in practice,” analysts expect those policies to be loosened.

“While the positive start to growth in 2017 emboldened policymakers to raise interbank interest rates and tighten regulation of the financial system and local government debt, we do not think that China’s leadership wants to see economic growth slowing significantly below 6.5%,” Louis Kuijs, a Hong Kong-based analyst with research firm Oxford Economics, wrote in a report after the data.

“Hence, significant further loss in economic momentum in the coming months will probably lead to efforts to ease up monetary conditions,” he said.

Contact reporter Fran Wang (fangwang@caixin.com)