China Slowdown Deepens on Trade Tensions and Weak Credit Growth

(Bloomberg) -- China’s expansion looks to have slowed further this month, underscoring the fragility of the world’s second-largest economy as the next wave of tariffs in the trade dispute with the U.S. approaches.

A sharp deceleration in credit expansion may have weighed on the economy, according to Fielding Chen at Bloomberg Economics, who aggregates the earliest available indicators into one reading. The impact of slower credit growth amid a government campaign to clean up the financial system has, along with the escalating trade war, hurt sentiment for smaller companies as well as stock and property investors.

A full dashboard, which will include the official China purchasing manager indexes due on Saturday and South Korea exports, will be available from Bloomberg Economics early next month. Economists surveyed by Bloomberg see an easing of both official manufacturing and services gauges.

Trade frictions and concerns about whether the economy is slowing down more have sent Chinese stocks into a bear market and its currency sliding past 6.6 per dollar for the first time since December. The central bank has intervened verbally to calm markets, and also increased policy support for the economy by cutting the amount of money banks have to lock away, letting them lend more.

"Authorities are supporting smaller enterprises and keeping liquidity sufficient to react to the downward pressure," Chen said. "The trade war has hurt market sentiment, but its impact on the economy hasn’t yet materialized."

Relations between Washington and Beijing have deteriorated, with both sides now threatening increase tariffs from early July and retaliation for the other’s actions. The two nations are promising to impose tariffs on $34 billion of each others exports from next Friday, with more to come.

Bright Spots

While that in itself may not derail the strong Chinese export picture which was seen in the first five months of 2018, the threat of further tariffs, investment restrictions and a worsening relationship with the U.S. are weighing on sentiment in China.

Adding to those woes, demand from all major export destinations has already slowed. A weighted average of the flash PMI readings of trade partners including the U.S., the European Union and Japan point to a weakening outlook.

There are bright spots in the June data, as factory inflation holds up, underpinning industrial profits which surged more than 20 percent in April and May. Strong factory-gate price increase will help the firms pay off their debts.

The crackdown on shadow banking is taking its toll on smaller companies, as they’re not the most favored borrowers of state-run banks. Among manufacturers, small firms reported deteriorating conditions in official May data, while the reading for their big counterparts registered a robust expansion.

"We see headwinds from China’s housing market, export sectors and private firms on lower investment appetite, rising trade tensions between China and the U.S., and tighter credit conditions," Shen Lan, a Beijing-based economist at Standard Chartered Plc who oversees the bank’s monthly survey into more than 500 smaller enterprises, wrote in the June report.

"Deleveraging efforts will likely continue, but mainly through regulatory means rather than monetary policy tightening, " Shen said.

To contact Bloomberg News staff for this story: Xiaoqing Pi in Beijing at xpi1@bloomberg.net;Adrian Leung in Hong Kong at aleung206@bloomberg.net

To contact the editors responsible for this story: Jeffrey Black at jblack25@bloomberg.net, James Mayger

©2018 Bloomberg L.P.

With assistance from Editorial Board