China Q2 GDP growth cools as factory output weakens, trade row flares

China’s exports grew at a solid pace in June, though analysts suggest front-loading of shipments ahead of tariffs taking effect may have boosted the figures. (Reuters)
Updated 16 July 2018
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China Q2 GDP growth cools as factory output weakens, trade row flares

  • The economy grew 6.7 percent in the second quarter from a year earlier, in line with expectations and slightly lower from the first quarter
  • Chinese policymakers have started to step up policy support for the economy and have softened their stance on deleveraging

BEIJING: China’s economy expanded at a slower pace in the second quarter as Beijing’s crackdown on debt risks crimped activity, while June factory output growth weakened to a two-year low in a worrying sign as a heated trade war with the United States threatens to knock exports.
The more timely activity indicators for last month backs market views that growth is cooling, with some analysts calling for the government to take stronger measures to support the economy.
“They need to slow financial deleveraging slightly and to turn their focus more on growth-supportive measures, for example increasing liquidity through (bank reserve requirement) cuts,” said Iris Pang, Greater China Economist at ING in Hong Kong.
“If the situation gets worse a lot faster than what we expect I do think Chinese authorities need to beef up supportive measures, both fiscal and monetary.”
The economy grew 6.7 percent in the second quarter from a year earlier, in line with expectations and slightly lower from the first quarter, the National Bureau of Statistics said on Monday.
First half fixed asset investment growth was a record low, while industrial output for June matched the slowest growth rate in over two years at 6.0 percent and missed forecasts centered on 6.5 percent expansion.
Analysts polled by Reuters had expected the economy to expand 6.7 percent in the April-June quarter.
On a quarterly basis, growth picked up 1.8 percent from 1.4 percent in the first quarter, beating expectations of 1.6 percent growth.
The second-quarter data weighed on markets around Asia, adding to investor concerns about the impact of the Sino-US trade war on economic growth in China and the rest of the world. The Shanghai Composite index and the blue-chip CSI300, the world’s worst-performing major indexes this year, each fell 0.7 percent. MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.4 percent.
The world’s second largest economy has already felt the pinch from a multi-year crackdown on riskier lending that has driven up corporate borrowing costs, prompting the central bank to pump out more cash by cutting reserve requirements for lenders.
Data on Friday showed China’s exports grew at a solid pace in June, though analysts suggest front-loading of shipments ahead of tariffs taking effect may have boosted the figures. More worryingly, the trade surplus with the United States hit a record high last month and looks set to keep a bitter tariff dispute with Washington on the boil for a while longer.
The administration of US President Donald Trump has raised the stakes in its trade row with China, saying it would slap 10 percent tariffs on an extra $200 billion worth of Chinese imports, including numerous consumer items.
Other data showed retail sales rose 9.0 percent in June from a year earlier, in line with market forecasts.
Faced with a slowdown in domestic demand and the potential fallout from the trade war, Chinese policymakers have started to step up policy support for the economy and have softened their stance on deleveraging.
China’s economy is likely to experience a mild slowdown in the second half of the year as financial market risks become “obvious” and demand is expected to decline, official think tank State Information Center (SIC) recently said.
The nation’s financial regulator has told banks to “significantly cut” lending rates for small firms in the third quarter in comparison with the first quarter, two people with direct knowledge of the matter told Reuters last week.
The People’s Bank of China, which has cut banks’ reserve requirements three times this year, has recently replaced its use of the term “deleveraging” with “structural deleveraging,” a change that suggests less harsh curbs on debt.
Nomura economists said in a recent note they expected the PBoC to deliver at least one more RRR cut before year-end, likely by 100 basis points and increase direct funding to the real economy via other liquidity injection tools, such as the supplementary lending facility.


Oil mixed on tighter US outlook

Updated 21 August 2018
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Oil mixed on tighter US outlook

  • Traders said US markets were lifted by a tightening outlook for fuel markets in the coming months
  • The Iran supply cut may also be more than compensated for by production increases outside OPEC

SINGAPORE: Oil prices were mixed on Tuesday, with US fuel markets seen to be tightening while the Sino-US trade dispute dragged on international crude contracts.
US West Texas Intermediate (WTI) crude futures for September delivery were up 27 cents, or 0.4 percent, at 0306 GMT, at $66.70 per barrel. The contract expires on Tuesday.
The more active October futures were up 7 cents, or 0.1 percent, to $65.49 a barrel.
Traders said US markets were lifted by a tightening outlook for fuel markets in the coming months.
Inventories in the United States for refined products such as diesel and heating oil for this time of year are at their lowest in four years.
This is occurring just ahead of the peak demand period for these fuels, with diesel needed for tractors to harvest crops and the arrival of colder weather during the Northern Hemisphere autumn raising consumption of heating oil.
Outside the United States, Brent crude oil futures were somewhat weaker, trading at $72.18 per barrel, down 3 cents from their last close.
This followed the United States offering on Monday 11 million barrels of crude from its Strategic Petroleum Reserve (SPR) for delivery from Oct. 1 to Nov. 30.
The released oil could offset expected supply shortfalls from US sanctions against Iran, which will target its oil industry from November.
Because of the sanctions, French bank BNP Paribas said it expected oil production from the Organization of the Petroleum Exporting Countries (OPEC), of which Iran is a member, to fall from an average of 32.1 million barrels per day (bpd) in 2018 to 31.7 million bpd in 2019.
Still, traders said overall market sentiment was cautious because of concerns over the demand outlook amid the trade dispute between the United States and China.
A Chinese trade delegation is due in Washington this week to resolve the dispute, but US President Donald Trump told Reuters in an interview on Monday he does not expect much progress, and that resolving the trade dispute with China will “take time.”
The impact of the Iran sanctions is not yet clear.
China has indicated that it will continue to buy Iranian oil despite the US sanctions.
The Iran supply cut may also be more than compensated for by production increases outside OPEC.
BNP Paribas said non-OPEC output would likely grow by 2 million bpd in 2018 and by 1.9 million bpd next year.
“Depending on when pipeline infrastructure constraints are lifted in the US, non-OPEC supply growth by the end of 2019 may prove higher than currently assumed,” the bank said.
The search for new oil has increased globally in the last two years, with the worldwide rig count rising from 1,013 at the end of July 2016 to 1,664 in August 2018, according to energy services firm Baker Hughes.
The biggest increase was in North America, where the rig count shot up from 491 to 1,057 in the last two years.
How prices develop will also depend on demand.
“We see global oil demand growing by 1.4 million barrels per day in both 2018 and 2019,” BNP Paribas said, implying that global markets are likely to remain sufficiently supplied.