China’s real activity deteriorates in July; industrial output likely to face downward pressures in H2

China’s real activity falls in July. The nation’s industrial production dropped down to 6 percent year-on-year in July, as compared with the 6.2 percent growth recorded in June. The industrial output is expected to continue to face downward pressures in the second half of 2016 because of efforts to meet overcapacity targets, said ANZ in a research report.

The floods that happened recently in the Yangtze River Economic Belt have disturbed production in the short term. Moreover, factories in Hangzhou region might have suspended production since August because of the forthcoming G20 meeting in early September that might further hurt the industrial production in the third quarter.

Meanwhile, the effect of the flood and G20 is temporary. However, growth is expected to remain uneven in the second half of 2016 as traditional manufacturing sectors underperform, noted ANZ. The NDRC, in particular, has announced a total cut down of steel and coal capacity deadline of November. China, as of the end of July, has finished 47 percent and 38 percent of its steel and coal reduction targets respectively.

Retails sales continued with its double-digit growth in July, showing resilient domestic consumption. Car sales by large enterprises witnessed strong growth of 9.2 percent year-on-year. Car sales are expected to continue underpinning retail sales in the near term as the tax reduction for small-engine cares would be in effect until the end of this year, according to ANZ.

In the meantime, fiscal policy would be the main factor in stimulating growth in the second half of 2016 as private investment falls in July. Headline fixed asset investment decelerated considerably to 8.1 percent year-on-year between January and July as private investment rose just 2.1 percent. Even if today’s data strengthens the view that the real estate sector has reached its peak, rising 5.3 percent on annual basis in January to July period, the authorities are expected to remain cautious of property prices that are overheating.

Therefore, easing of monetary policy would be restricted in the second half with just additional 50 basis points reduction of RRR on the table, stated ANZ. Meanwhile, fiscal policy would be required to quicken in the months ahead for China to reach its growth rate target of 6.5 percent to 7 percent in 2016, added ANZ.