China’s economy shows signs of weakness as investment slumps
Deteriorating domestic indicators add pressure on policymakers to increase stimulus spending
China’s domestic economic indicators weakened further last month, piling pressure on policymakers to take more forceful measures to reinvigorate stronger growth in the world’s second-largest economy.
Retail sales grew 0.4 per cent year-on-year in August, data from the National Bureau of Statistics showed on Tuesday, down from 0.6 per cent growth in July and falling short of a median forecast of 0.8 per cent growth from analysts polled by Bloomberg.
Fixed asset investment declined 7.2 per cent over the first eight months of the year on a year earlier, deepening from a fall of 6.7 per cent in the year to July and slightly weaker than median analyst expectations of minus 7.1 per cent.
Industrial production strengthened, meanwhile, rising 5.2 per cent year on year. That exceeded growth of 4.5 per cent in July and median analysts’ expectations of 4.8 per cent, as China’s export machine has roared ahead in recent months.
“The divergence within China’s economy continued to widen in August, with consumption and investment both underperforming market forecasts, but exports and industrial production both stronger than expected,” said Lynn Song, chief economist for greater China at ING.
China has relied in recent years on industrial output and exports — which rose 25 per cent in August — to drive economic activity, as a five-year property sector slowdown has weighed on household confidence and damped domestic consumption.
The latest data suggested that “strategic manufacturing remains capable of generating strong output growth but the domestic demand base needed to absorb that expanding productive capacity remains weak”, said Yuhan Zhang, principal economist at the Conference Board’s China Center.
“The economy is becoming more dependent on productivity gains, technology upgrading and external demand to monetise new industrial capacity.”
China’s export growth has also swelled its trade surpluses, particularly with the EU. That has stoked tensions, as foreign governments worry that competition from high-quality, lower-cost Chinese goods will lead to deindustrialisation in their own countries.
Zhang said the domestic slowdown and the “globalisation of Chinese industrial capacity” were “two sides of the same story”, with implications for China’s outbound investment, trade relations and manufacturing competition globally.
The slowdown in China’s domestic economic indicators has forced Beijing to signal it will speed up public spending this year. Second-quarter economic growth was reported at 4.3 per cent, one of its lowest readings in decades, as weak consumer demand and falling investment weighed on sentiment.
ING’s Song said the government’s rollout of economic policy support measures has been limited, meaning that “downward growth pressures persist”.
Unless the economy showed “unexpectedly strong” growth in September, he added, third-quarter GDP growth will be close to or below the bottom of the government’s full-year 2026 growth target of 4.5-5 per cent.
The property sector, meanwhile, showed further signs of weakness. Data from the NBS on Tuesday showed that new home prices in 70 cities fell 0.17 per cent from July, when they fell 0.18 per cent. Resale home prices fell 0.31 per cent from 0.29 per cent a month earlier.
Fu Linghui, NBS spokesperson and chief economist, said China’s economy was growing positively and was “expected to maintain stable operation, with the quality of development steadily improving”.
But he added: “Of course, we must also recognise that there are still many risks and challenges on the road ahead. The external environment is complex and severe, and the pressure from domestic structural adjustment remains.”
In an apparent acknowledgment of foreign concerns over China’s trade surpluses, Fu also said that “in the next stage, we must . . . promote balanced trade development”.