Chinese factory output slowed to its weakest pace in nearly six years in August while property sales, retail sales and investment also cooled.
That’s a development which will see the value of the Australian dollar and local shares come under renewed pressure today.
And while there’s a mitigating factor which gives a slightly different picture, the overall tone from the report, and earlier data releases during the week, is that the Chinese economy slowed noticeably in August.
While exports were stronger, imports fell helped by lower world prices, but also weakening demand and the bigger than forecast fall in consumer inflation told us that price pressures are easing through the Chinese economy, especially with producer prices again falling.
The sharp drop in production was a reaction to weakening retail sales and urban investment. Credit rose from July’s ultra low levels, but loans to home buyers fell last month.
The weekend’s figures show China’s industrial output grew at an annual rate of just 6.9% in August from a year earlier (when it rose 10.4%), slowing sharply from a 9% increase in July, and below economists’ expectations of 8.7% growth.
In the first eight months of this year, industrial output grew 8.5% from the same period last year. That was down from the 8.8% in the seven months to July.
In particular, electricity output — a closely watched economic indicator — dropped 2.2% from a year earlier in August.
That was the first fall in electricity demand in four years.
China’s industrial production slows in August
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As well, car production grew only 3.1%, down sharply from 10.5% in July, while cell phone production fell by 2.3%.
Crude steel production, an important indicator for Australia and the iron ore export industry, was also weak, rising just 1% from a year earlier but was down 0.9% from July to 68.91 million tonnes.
Crude steel output in the first eight months of the year rose 2.6% on year to 550.1 million tonnes.
Daily average production in August reached 2.22 million tonnes, level with July but down from the record daily production of 2.31 million tonnes in June.
Retail sales rose 11.9% in the eight months to August, down from the 12.2% growth rate in July (and perhaps influenced by lower food prices, which helped push consumer inflation down to just 2% in the month from a year ago).
Fixed-asset investment, an important driver of economic activity, grew 16.5% in the first eight months from the same period last year, lower than forecasts and well under the 17% rate in the seven months to July.
And hinting at the extent of the slowdown, the government said fiscal revenue rose 6.1% year on year to 910.9 billion yuan ($US149.33 billion) in August, slowing from the 6.9% rise in July.
The Ministry of Finance said central government revenue reached 445.4 billion yuan, up 5.5% year on year, while local government revenue rose 6.6% to 465.5 billion yuan.
The pace of fiscal spending also slowed. In August, national fiscal expenditures was up 6.2% to 1.02 trillion yuan, down sharply from the 9.6% surge in July.
But there’s a small technical factor which puts the sharp fall in output in a different light.
While the economy undoubtedly slowed in August, there’s what’s known to economists as the base effect.
In August 2013 output was up 10.4% (annual) the highest rate for 17 months, and a rate that hasn’t been topped since.
So any slowing would naturally look a lot weaker compared to such a strong performance.
And output will continue to slow by more than it possibly is because September, October and November of last year all saw 10% plus growth rates in industrial output.
In fact output in August actually grew from July – 0.2% (not great, but growth nevertheless), according to the Statistics Bureau.
But that can’t disguise the weaknesses now clear in the Chinese economy, led by property.
The property market continues to struggle as home buyers expect further price cuts and sales continue to slow.
Property investment data released on the weekend showed further declines in sales and new construction along with a drop in mortgages, while growth in the production of housing-related goods such as home appliances, furniture and building materials such as steel and cement all slowed.
In fact mortgage issuance in the first eight months of this year fell 4.5% percent from a year earlier, worse than the 3.7% drop in January-July.
Housing sales in China in the first eight months of the year fell 10.9% to 3.43 trillion yuan ($US559 billion), following a drop of 10.5% in the first seven months of the year.
House price data out later this week will further confirm the impact of the slowdown in this vital sector.
