Key real economy indicators released August 14th showed data on both the supply and demand sides have fallen below expectations over July. Industrial output rose 6.4 percent YoY in July, vs. Bloomberg's forecast of 7.1 percent, slowing down from June's 7.6 percent. Retail sales increased 10.4 percent YoY, falling from 11 percent reported for June. Fixed-asset investment over 7M17 moved up 8.3 percent YoY, declining steadily from that recorded in June.
China's exports increased 7.2 percent YoY in dollar terms, and imports improved 11.0 percent YoY, lower than forecasts of 11.0 percent and 18.0 percent respectively. Softening demand is underlined further by weak inflation data. Consumer Price Index (CPI) and Producer Price Index (PPP) underperformed in July, with CPI increasing 1.4 percent YoY vs. 1.5 percent from a Bloomberg forecast, and PPI increasing 5.5 percent YoY vs. 5.6 percent expected.
Both real and nominal data indicate an underperformance that suggests a slowdown from 1H17 and increased downside risks over the remainder of the year. Furthermore, the 19th National Congress of the Communist Party later this year means policymakers will be keen to ensure growth is steady in a year where Xi Jinping may seek to strengthen his hand ahead of key reforms and/or restructuring.
KResearch maintains its view that the PBOC will refrain from raising its policy rate over 2017, due to dovish concerns. In light of the spate of new, tepid data, it is our view that policymakers will not only refrain from more direct tightening measures, but will for now, hold off on further deleveraging attempts altogether. Of course debt is still a concern, one worsened by a slowing economy, as slowing growth means slower sales, and slowing PPI means tighter corporate margins, both of which would worsen debt servicing abilities. As such, should the economy pick up and the Party Congress proceed smoothly, we would expect to see more policies aimed at slowing credit growth towards the year's end, when the effects on growth would likely not be borne out until next year.