General views of China’s economy (Photographer: Justin Chin/Bloomberg)

China's Economy Weakened Further in July, Early Indicators Show

(Bloomberg) -- The earliest indicators for China’s economy showed the pace of expansion slowing this month, highlighting the reasons behind policy makers’ decision to add stimulus in the face of escalating trade tensions.

“Domestic businesses were dented by tightening financing conditions, while trade conflict hits exports and hurts market sentiment," according to Fielding Chen at Bloomberg Economics, who aggregates the earliest available indicators on business conditions and market sentiment.

China's Economy Weakened Further in July, Early Indicators Show

With the funding squeeze hurting domestic activity and the trade war threatening external demand, policy makers have unveiled a package of fiscal support including tax cuts and acceleration of bond issuance for infrastructure investment, while the central bank has cut reserve ratios three times this year. There are also signs that the ongoing campaign to curb leverage is being softened.

An index of conditions at small and medium-sized enterprises from Standard Chartered Plc declined to 55.7 in July from 56 in June, weighing down by a drop in a sub-gauge of credit.

“SMEs’ financing conditions have worsened, with credit access becoming more difficult and funding costs being high,” Shen Lan, a Beijing-based economist in charge of the survey on more than 500 smaller companies at Standard Chartered, wrote in a note. “This adds to the case for more targeted easing.” She sees the need to increase banks’ risk appetite and develop other financing channels to facilitate funding for those firms.

With the escalation of the trade dispute rattling markets, gauges of stock sentiment and commodity prices all indicate weakness. External demand, signaled by the weighted average of the flash PMI readings of trade partners including the U.S., the European Union and Japan, also edged down.

Producer inflation held up, with a Bloomberg tracker signaling robust prices. As industrial output slowed more than expected last month, sustained inflation would help bolster factory profits.

The expansion remained stable in July but business confidence fell further, according to London-based research firm World Economics Ltd. “Even though sales have remained stable in July, sales managers have expressed worry that the overall growth trend can’t continue,” Chief Executive Ed Jones wrote in a report.

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