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.


Undersea gas fires Egypt’s regional energy dreams

Updated 19 min ago
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Undersea gas fires Egypt’s regional energy dreams

  • In the past year, gas has started flowing from four major fields off Egypt’s Mediterranean coast
  • Gas production has now hit 184 million cubic meters a day

CAIRO: Egypt is looking to use its vast, newly tapped undersea gas reserves to establish itself as a key energy exporter and revive its flagging economy.
Encouraged by the discovery of huge natural gas fields in the Mediterranean, Cairo has in recent months signed gas deals with neighboring Israel as well as Cyprus and Greece.
Former oil minister Osama Kamal said Egypt has a “plan to become a regional energy hub.”
In the past year, gas has started flowing from four major fields off Egypt’s Mediterranean coast, including the vast Zohr field, inaugurated with great ceremony by President Abdel Fattah El-Sisi.
Discovered in 2015 by Italian energy giant Eni, Zohr is the biggest gas field so far found in Egyptian waters.
The immediate upshot has been that since September, the Arab world’s most populous country has been able to halt imports of liquified natural gas, which last year cost it some $220 million (190 million euros) per month.
Coming after a financial crisis that pushed Cairo in 2016 to take a $12 billion loan from the International Monetary Fund, the gas has been a lifeline.
Egypt’s budget deficit, which hit 10.9 percent of GDP in the financial year 2016-17, has since fallen to 9.8 percent.
Gas production has now hit 184 million cubic meters a day.
Having met its own needs, Cairo is looking to kickstart exports and extend its regional influence.
It has signed deals to import gas from neighboring countries for liquefaction at installations on its Mediterranean coast, ready for re-export to Europe.
In September, Egypt signed a deal with Cyprus to build a pipeline to pump Cypriot gas hundreds of kilometers to Egypt for processing before being exported to Europe.
That came amid tensions between Egypt and Turkey — which has supported the Muslim Brotherhood, seen by Cairo as a terrorist organization, and has troops in breakaway northern Cyprus.
In February, Egypt, the only Arab state apart from Jordan to have a peace deal with Israel, inked an agreement to import gas from the Jewish state’s Tamar and Leviathan reservoirs.
A US-Israeli consortium leading the development of Israel’s offshore gas reserves in September announced it would buy part of a disused pipeline connecting the Israeli coastal city of Ashkelon with the northern Sinai peninsula.
That would bypass a land pipeline across the Sinai that was repeatedly targeted by jihadists in 2011 and 2012.
The $15-billion deal will see some 64 billion cubic meters of gas pumped in from the Israeli fields over 10 years.
Independent news website Mada Masr reported that Egypt’s General Intelligence Service is the majority shareholder in East Gas, which will earn the largest part of the profits from the import of Israeli gas and its resale to the Egyptian state.
Kamal said he sees “no problem” in that, adding that the agency has held a majority stake in the firm since 2003.
“That guarantees the protection of Egyptian interests,” he said.
Ezzat Abdel Aziz, former president of the Egyptian Atomic Energy Agency, said the projects were “of vital importance for Egypt” and would have direct returns for the Egyptian economy.
They “confirm the strategic importance of Egypt and allow it to take advantage of its location between producing countries in the east and consuming countries of the West,” he said.
The Egyptian state is also hoping to rake in billions of dollars in revenues from petro-chemicals.
Its regional energy ambitions are “not limited to the natural gas sector, but also involve major projects in the petroleum and petrochemical sectors,” said former oil minister Kamal.
Minister of Petroleum and Mineral Resources Tarek El Molla recently announced a deal to expand the Midor refinery in the Egyptian capital to boost its output by some 60 percent.
On top of that, the new Mostorod refinery in northern Cairo is set to produce 4.4 million tons of petroleum products a year after it comes online by next May, according to Ahmed Heikal, president of Egyptian investment firm Citadel Capital.
That alone will save the state $2 billion a year on petrochemical imports, which last year cost it some $5.2 billion.
Egypt is also investing in a processing plant on the Red Sea that could produce some four million tons of petro-products a year — as well as creating 3,000 jobs in a country where unemployment is rife.