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Published On: Wed, Aug 13th, 2014

China’s economy softened further in July

China’s economy continued softening in July despite steady government stimulus measures; more accommodative policy needed for the economy to return to its full potential.

China’s economy continued softening in July despite steady government stimulus measures; more accommodative policy needed for the economy to return to its full potential.

China’s economy softened further in July, despite government stimulus measures, so more support may be necessary to deal with the continuing downturn in properties and the staggering growth. The second largest economy worldwide showed unexpectedly paltry investment, retail sales and lending growth for July.

The biggest surprise came with Wednesday’s data on credit and financing: cash feeding into the Chinese economy plummeted to just one seventh of June’s amount for July: 273.1 billion yuan, or $44.34 billion.

The central bank was not very concerned, interpreting the bank lending slump as a natural drop after the unusual June surge but acknowledged slowing loan demand. According to analysts, the mighty drop may be the result of a crackdown implemented on high-risk loans and commodity financing, following a fraud scandal at Qingdao port.

The news aroused concerns amid economists that it was not only a matter of weakening loan demand within the property sector, but also heightened wariness of banks towards lending, owing to mounting credit risks. The market mood contrasted to June sentiment when the economy appeared recovering after the weak year start. Investment is short of market expectations, credit growth in the corporate sector has declined substantially.

The solution is expected as further loosening of monetary policy, possibly interest rate reduction, together with reducing red-tape and attracting private capital.

The steady government stimulus has enabled an economy rebound for China, to 7.5 percent for the second quarter, conforming to the government full-year target, after 7.4 percent for the first quarter, an 18-month low.

The property downturn, however, has hit domestic spending, and the economy is ailing again. The services sector was unexpectedly weak last week, linked to housing sector slowdown, making the sustainability of the economic recovery questionable again.

The housing sector accounts for about 15 percent of the Chinese economy. This year it is struggling, with worsening prices and sales, posing risks to global growth. As Wednesday data showed, there might be further deceleration, with housing sales sharply slumping 16.3 percent in July, compared to a year earlier, after the June 0.2 percent annual decline.

Easier access to loans is seen as a deterrent to property market correction, and developers are increasingly impeded in accessing funding via banks or trust loans, owing to rising borrowing costs and banks’ reluctance to loan to first-time home buyers.

According to analysts, the grappling real estate market has impeded overall investment growth: in the first seven months it saw a 17 percent increase compared to a year ago, unseen for over 12 years.

The government is expected to go on with supportive measures. But as to more robust loosening, like reducing interest rates, or cutting the reserve requirement ratio for banks to support growth, there is dissent amid economists.Opponents to further loosening, like the International Monetary Fund, point that the Chinese economy is deep in credit, so authorities must not resort to adding cash, unless there is crumbling in growth.

Latest data indicate certain amounts of resilience, with industrial output rising 9 percent in July compared to a year earlier, down from 9.2 percent in June, but still conforming to market expectations. Exports grew almost twofold compared to expectations, though imports declined, indicating slack domestic demand. Economists think the government should relax policies further.

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