Concerns About China Outlook Intensify
By TOM ORLIK And AARON BACK
New loans by China's banks fell to 540.1 billion yuan ($85.1 billion) in July, down from 919.8 billion yuan in June, and the lowest level since September 2011, despite efforts by the central bank to make it easier to lend. Export growth also disappointed. July exports were up just 1% from a year ago, slowing from June's 11.3% pace.
The data added to fears China's slowdown would continue into the third quarter.
Agence France-Presse/Getty Images
Steel bars being unloaded
outside a factory in China's Anhui province Monday. Trade and loan data
Friday pointed to continued economic weakness.
China's economy is being hit by a confluence of headwinds to growth, as the problem of decelerating export demand is compounded by weakness in domestic investment. A government initiative to prevent a property bubble through restrictions on apartment purchases is hobbling real-estate investment, and spilling over into weaker growth in factory output.
A faltering recovery in China, a key driver of global growth, is especially unwelcome as Europe continues to struggle with its sovereign-debt crisis and the U.S. recovery remains tepid.
The markets reacted negatively to the data in both Asia and Europe, where it helped drive stocks lower. The Shanghai Composite Index ended the day down 0.2%, and Hong Kong's China-dominated Hang Seng Index fell 0.7%. The Australian dollar and other regional currencies fell against the U.S. dollar.
Cuts in interest rates in June and July by China's central bank and a focus on growth in speeches by leaders from President Hu Jintao down appear to have done little to boost business confidence. Falling orders and fading profits have hit business demand for loans. Medium- and long-term loans to enterprises, a key measure of investment appetite, fell to 92 billion yuan in July, down from 163 billion yuan in June and the lowest level so far this year.
A loan officer at a major state-owned bank said he had seen little impact on investment activity from the interest-rate cuts. "Loans to small and medium firms fell in July," he said. "Big businesses are taking advantage of lower rates to pay off their debts."
He Weisheng, China strategist at Citibank, said that past overinvestment was to blame for sluggish loan appetite. "Manufacturing and property, two of the main engines of China's investment, are both plagued by overcapacity, so I expect investment growth will continue falling," he said.
The euro-zone crisis added to problems for China's policy makers. Exports to the European Union fell sharply, down 16.2% in July from a year earlier. Growth in exports to the U.S. was also weak, down to 0.6% from 10.6% in June. At a press briefing on Friday, Vice Commerce Minister Gao Hucheng said China would face "pressure" hitting its 10% growth target for total trade this year.
Kong Weiguo, a manager at a manufacturer of factory equipment for the automotive and home-appliance sectors in Dalian, a city in northeast China, said orders from customers in the U.S. and Europe started to fall at the end of 2011 and had yet to recover. "I am not optimistic about the third quarter," he said.
The stream of negative numbers raises expectations that the government will do more to stimulate growth. "The weak data suggest that policy easing by the central bank so far has not been sufficient. They will have to be more aggressive cutting the reserve requirement ratio," said Liu Ligang, China economist at ANZ. Cuts in the reserve requirement ratio for banks free up funds for China's lenders to make loans.
Some government economists said that with investment appetite weak, easing lending conditions alone wouldn't be effective. A senior researcher at a government think tank said higher public spending had to be part of the solution.
"We can't depend on more loans to solve the problems of the real economy; higher government spending should be the main instrument," the researcher said. "But the decision-making process on fiscal policy is quite complicated, especially during a transition for the top leadership."
There were signs that the government is ramping up public spending to support growth. Fiscal spending was up 37% in July from a year earlier, compared with an 8.2% increase in revenue, as Beijing takes advantage of low public debt to shift spending into stimulus mode. The government of Changsha, the capital of Hunan province in central China, was one of several to announce plans to boost growth with higher infrastructure investment.
Still, economists expected that merely to offset fading demand from the private sector, rather than push growth higher. Deutsche Bank's Mr. Ma expected year-to-year growth in the third quarter to be in line with the second quarter's 7.6%, the lowest since early 2009, during the financial crisis.
—Stefanie Qi, Grace Zhu, Liu Li and Yajun Zhang contributed to this article. Write to Tom Orlik at thomas.orlik@wsj.com and to Aaron Back aaron.back@wsj.com
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Concerns About China Outlook Intensify
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