China July Activity Data Review: More Downside than Upside

China’s economic imbalances continued to deepen in July, as sluggish retail sales and a fixed-asset investment slump highlighted persistent weakness in domestic demand, with analysts expecting more policy stimulus from Beijing to stave off downside risks.

Retail sales rose by a meagre 0.6 per cent year on year in July, missing the 1.5 per cent forecast rate . industrial output rose 4.5 percent from a year ago, slowing from 5.3 percent growth in June. Factory output was likely hampered by unusually active extreme weather last month, with three typhoons making landfall and millions of people relocated across China's eastern and southern manufacturing hubs. Fixed-asset investment contracted by 6.7 percent for the January–July period compared to the same period last year, but China made steady progress on a number of key railway projects as investment in railway construction continued to expand, the national railway operator said on Monday.

Robust exports, buoyed by the global AI infrastructure buildout, have continued to support China's factories. But weak domestic demand remains a major risk that leaves the economy vulnerable to shocks such as weather disruptions and trade barriers. China logged another month of more than US$100 billion in trade surplus last month, with the full-year total on track to top US$1 trillion for a second year.

However, the Weaker-than-expected July data increases pressure on Beijing to introduce additional fiscal stimulus and policy support to shore up domestic demand. Policymakers have been relying partly on trade-in subsidies to support purchases of autos, home appliances, and other durable goods. Furthermore, we note that the pace of subsidy distribution had weakened again in July, with daily average sales dropping to 6.3 billion yuan (US$934.8 million) from 9 billion yuan in June. The weaker subsidy no doubt affect all three economic indicators: retail sales, industrial production, and urban fixed asset investment.