Chinese investment, retail sales slow in July

A raft of data on the Chinese economy released at the tail-end of the week undershot economists´ forecasts by a wide margin, raising doubts in some corners of the market about the efficacy of recent stimulus and highlighting the need for structural reforms in order to boost growth.

Industrial production, retail sales and fixed asset investment all slowed notably in July from June, although the details of the former two were not as weak as might appear upon first examination, Julian Evans-Pricthard, China economist at Capital Economics said in a research report sentto clients.

Nonetheless, "rising debt levels among state firms means that policymakers cannot rely on rapid state sector spending to prop up growth indefinitely. And with private investment unlikely to stage a full recovery without significant structural reforms, a further slowdown in Chinese growth over the medium-term looks all but inevitable," Evans-Pritchard wrote in a research note sent to clients.

Industrial production in China slowed to a 6.0% year-on-year pace in July (consensus: 6.2%), down from 6.2% in the month before. In parallel, retail sales slowed from a 10.6% clip to 10.2% (consensus: 10.5%).

However, electricity output growth, a closely-watched proxy for activity in heavy industry, was at its strongest since mid-2013. Steel output was also up. In real terms retail sales also still looked "healthy" in comparison to the first half of 2016.

More ominously, the year-to-date rate of growth in fixed asset investment slowed to a 8.0% year-on-year clip (consensus: 8.9%).

That might be indicative of investment slowing in July by the most in over 20 years, Evans-Pritchard said.

Public sector investment was the main culprit behind the slowdown, although the private sector´s retrenchment also deepened, with investment in property and infrastructure turning down.

"A further sharp slowdown in investment growth means that unless the government steps up policy support, it is only a matter of time before the economy begins to slow again," Evans-Pritchard said.

In his opinion, another across-the-board reduction in lenders´ reserve requirement ratios or interest rate cut from the People´s Bank of China were unlikely in 2016.

Rather, officials in Beijing now looked likely to step-up their fiscal support and employ targeted monetary support, he said.

Asian markets appeared to blow off the data in an initial reaction. The Shanghai Stock Exchange´s Composite Index was 1.60% higher by the close of trading at 3,050.667 and as of 08:48 BST dollar/yen was edging higher by 0.11% to 102.06.