China shifts gears as U.S. trade conflict grows

BEIJING — Fall-offs in factory output and investment in buildings, machinery and such are weighing on China’s growth, complicating Beijing’s task in managing the world’s second-largest economy amid a trade conflict with the U.S.

The Chinese economy clocked a 6.7% expansion rate in the second quarter from a year earlier, down slightly from 6.8% in the January-March period, the statistics bureau reported Monday. While that rate is within Chinese leaders’ comfort zone, some economists said more troubling are the drop-offs in business activity and domestic demand.

Industrial output rose 6% in June from a year earlier, markedly down from a pace of 6.8% in May. Meanwhile, investment in fixed assets grew 6% in the first half of the year — a notch down from the 6.1% rate in the first five months and a level not seen since the late 1990s.

The slack is partly due to a government campaign against debt that has made businesses skittish about spending. While Beijing is already shifting gears to support growth — and fend off any ill-effects from the escalating trade fight with the U.S. — some economists expect the slowdown to worsen in coming months before the lingering effects of the credit-tightening dissipate.

How much easing Beijing will resort to remains uncertain, economists said, with China’s economic managers trying to steer a course between bolstering growth and reigniting a rise in debt that leaders have seen as a longer term threat.

Some analysts expect a series of policy tweaks rolled out over months, rather than a full-bore stimulus, to see if a balance can be struck. "When you have flour, you add water; you have water, then you put in more flour," said Larry Hu, economist at Macquarie Group.

In recent weeks, Beijing has encouraged commercial banks to ramp up lending and outlined approvals for subway and other railway projects that it previously scotched during the campaign against debt. More such tweaks are likely, Mr. Hu said, unless growth veers below the 6.5% government-set growth target, necessitating more forceful remedies.

One lever Beijing is likely to pull is more fiscal spending, including larger government outlays on infrastructure and other projects, and measures to boost household consumption. "There is increasing pressure both inside and outside the government for such a policy shift," Chen Long, an analyst at Gavekal Dragonomics, wrote in a research note.

Beijing also looks likely to push ahead with a stalled initiative to bring private investors into local government-infrastructure projects, some analysts said. That program was put aside last year out of realization by Beijing that the private investors in some projects were really local governments disguising state money to get around the debt-cleanup campaign.

To encourage infrastructure building, economists expect Beijing to ease financing, including more bank loans for corporate borrowers and higher bond-issuance quotas for provincial governments and policy banks. The central bank began this April to decrease the amount of reserves lenders have to keep with it; further cuts are expected before the end of the year.

Too much stimulus could lead to overheating in the economy, in particular in the property market, and add to an already massive debt buildup.

Then there’s the brewing trade battle with the U.S. Economists estimate the fight could shave 0.2 to 0.5 percentage point off China’s GDP growth in the coming 12 months if the U.S. goes ahead and escalates, as it promised to do last week, by imposing tariffs on $200 billion in Chinese products. China’s exports to the U.S. account for around 20% of the country’s total exports.

Mao Shengyong, spokesman for the government’s statistics bureau, told reporters Monday that the government is ready to step in to counter any impact on the economy. He first said that "external uncertainties are increasing" and then played down the effect of the trade conflict, saying it would be "relatively limited."

–Grace Zhu and Lin Zhu contributed to this article.

Write to Chao Deng at [email protected]

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