A pedestrian footbridge and vehicles travelling along roads are seen from the observation deck of the Oriental Pearl Tower at night in the Lujiazui Financial District in Shanghai, China. (Photographer: Qilai Shen/Bloomberg)

Early Indicators Show China's Economy Weakening Again in August

(Bloomberg) -- The earliest indicators for China’s economy show that the pace of expansion slowed for a fourth month in August, highlighting the pressure for the government to push through pro-growth policies.

The data suggest the economy weakened further as demand from trading partners lost steam, with the decline in stock prices reflecting worsening sentiment. That’s according to a Bloomberg Economics gauge aggregating the earliest available indicators on business conditions and market sentiment.

Early Indicators Show China's Economy Weakening Again in August

Amid rising fears about a trade war, policy makers have unveiled measures to boost infrastructure construction and credit to smaller firms, as well as tax cuts. Such measures will take time to actually have an effect so the slowdown will probably continue, although analysts are looking at evidence of better sentiment in commodity markets.

It will take at least a few months for the economy to hit bottom and start recovering, according to Bloomberg Chief Asia economist Chang Shu, who doesn’t see any impact of the government’s measures yet. "It’s like a big ship -- it will take a bit of time to shift its course."

The first official data for August, the purchasing managers index for manufacturing and non-manufacturing sectors, will be released Friday at 9 a.m. Both will decline slightly, according to economists surveyed by Bloomberg.

External demand is also less likely to support the economy. U.S tariffs will hit Chinese exports and in addition, there was a deterioration in the weighted average of the flash PMI readings of trade partners including the U.S., the European Union and Japan.

Sentiment worsened on the stock market as the benchmark Shanghai composite index tumbling 5.1 percent this month through Friday. Property developers were among the worst performers, as good sales data prompted worries that policy might be tightened for the sector.

Still, there are some signs of a silver lining. While the three-month weighted average of the Standard Chartered Plc index on small and medium enterprises indicates a weakening bias, the August reading rebounded to 56.6 from 55.7.

"Measures to boost SME loans since July seem to be having an effect," according to a note from Shen Lan, the Beijing-based Standard Chartered economist in charge of the survey of more than 500 smaller companies. "Unclogging the monetary policy transmission mechanism and lowering borrowing costs for SMEs remain key to improving financial services for SMEs."

China’s central bank has reduced the reserve requirement ratio three times this year, partly aiming at channeling funds to smaller companies who struggle to get credit. The performance of smaller exporters weakened amid the trade tensions, while domestically-focused companies strengthened, according to Shen.

With the government ramping up support for infrastructure spending, iron ore prices have rebounded. That pickup in sentiment was also reflected in the surveys Macquarie Securities Ltd. conducted with China-based producers and traders of steel and copper. They point to stabilized demand and better sentiment, according to Larry Hu, a Hong Kong-based economist at the bank.

"We could see infrastructure fixed-asset investment and credit growth bottom out this or next month," Hu wrote in a note.

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

©2018 Bloomberg L.P.

With assistance from Editorial Board