Downbeat China factory output, retail sales add to urgency for stronger stimulus

By Kevin Yao, Ellen Zhang and Ethan Wang

BEIJING (Reuters) -China's industrial output growth slowed to a five-month low in August, while retail sales and new home prices weakened further, bolstering the case for aggressive stimulus to shore up the economy and help it hit its annual growth target.

The sluggish data released on Saturday echoed soft bank lending figures on Friday, underscoring weak growth momentum of the $18.6 trillion economy, the world's second-largest, in the third quarter.

Industrial output in August expanded 4.5% year-on-year, slowing from the 5.1% pace in July and marking the slowest growth since March, data from the National Bureau of Statistics (NBS) showed on Saturday.

That missed expectations for 4.8% growth in a Reuters poll of 37 analysts.

Retail sales, a key gauge of consumption, rose only 2.1% in August despite the summer travel peak, decelerating from a 2.7% increase in July. Analysts had expected retail sales, which have been anaemic this year, to grow 2.5%.

"The momentum is slowing down...The bottleneck remains domestic demand," said Xing Zhaopeng, ANZ's senior China strategist.

China's oil refinery output fell for a fifth month while crude steel output in August fell 6.1% from July, suggesting disappointing demand.

Faltering Chinese economic activity has already prompted global brokerages to scale back their 2024 China growth forecasts to below the government's official target of around 5%. The economy grew by 4.7% in the second quarter.

"The Q3 GDP is likely to be lower than Q2 based on current data flows. We expect large-scale stimulus to come soon," said Xing.

President Xi Jinping urged authorities on Thursday to strive to achieve the country's annual economic and social development goals, state media reported, amid expectations that more steps are needed to bolster a flagging economic recovery.

"As we are already toward the tail-end of the third quarter, time is running low for policymakers to introduce measures to buoy the economy amid numerous headwinds," said Lynn Song, chief China economist at ING.

The protracted property slump has led to Chinese consumers cutting back on spending. Some experts have even proposed distributing shopping vouchers to counter the trend.

Premier Li Qiang said last month the country will focus on stimulating consumption and look at measures to boost household income.

A central bank official said last week China still has room to lower the amount of cash banks must hold as reserves while it faces some constraints in cutting interest rates.

NO PROPERTY SECTOR REBOUND

Fixed asset investment rose 3.4% in the first eight months of 2024 from the same period a year earlier, compared with an expected 3.5% expansion. It grew 3.6% in the January to July period.

Liu Aihua, spokesperson of NBS, said at a press conference on Saturday that China's economic operations remained stable, but high temperatures and natural disasters affected growth last month.

Cash-strapped local governments issued bonds at a quicker pace in August for construction of major projects, with Liu saying the quickening bond issuance and policy initiatives will support investment growth.

However, the troubled property sector remains a major drag on growth. China's new home prices fell at the fastest pace in more than nine years in August. Only two of 70 surveyed cities reported home prices gains both in monthly and annual terms in August.

Property sales and investment slumped in the first eight months of the year.

To aid the housing market, China may cut interest rates on over $5 trillion in outstanding mortgages as early as this month, according to Bloomberg News.

While Beijing has ramped up efforts to rescue the housing market, many analysts say much more aggressive steps are needed to help debt-laden developers and encourage would-be home buyers back to the market.

Some other economic indicators released on Saturday too were unflattering. China's nationwide survey-based jobless rate climbed to 5.3% in August from 5.2% in the previous month, the NBS said, adding that more college graduates entered the job market to hunt offers.

The one bright spot for China recently has been exports, but analysts are not sure for how long the trend of rising exports will continue, given the increasing trade tensions with some countries and regions.

Zhiwei Zhang, chief economist at Pinpoint Asset Management, said investors will shift focus and wonder what will happen to growth in 2025.

"Will the tight fiscal policy stance continue into next year, when global growth will likely slow down and put pressure on China's exports?," Zhang said.

(Additional reporting by Liangping Gao; Editing by Muralikumar Anantharaman)