Chinese retail sales fall unexpectedly as consumer cautiousness prevails

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China’s retail sales slumped in July, disappointing expectations of a modest increase as consumers in the world’s second-largest economy failed to dispel suspicion of the coronavirus, as the recovery in the the factory sector was struggling to grow.

Asian markets retreated on Friday following the disappointing set of economic indicators, which raised concerns about the fragility of China’s emergence from the coronavirus.

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China’s recovery gained momentum after the pandemic crippled huge swathes of the economy as pent-up demand, government stimulus measures and surprisingly resilient exports propelled a rebound.

However, data from the National Bureau of Statistics on Friday showed weaker than expected year-over-year industrial production growth and retail sales extending declines for a seventh consecutive month in July. This was offset slightly by firmer real estate investment, which showed the recent stimulus to support construction activity.

“Looking ahead, we anticipate further acceleration of infrastructure investment in the coming months as expected government bond issuance continues to accelerate,” said Martin Rasmussen, Chinese economist at Capital Economics .

“This should lead to a further rebound in industry and construction, helping to absorb the slowdown in the labor market, indirectly support consumption and keep the economic recovery on track. ”

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Industrial production rose 4.8% in July from a year earlier, in line with June’s growth, but less than expectations of a 5.1% increase.

Retail sales were down 1.1% year on year, missing expectations of a 0.1% increase and following a 1.8% decline in June.

The decline in retail sales was widespread, with clothing, cosmetics, home appliances and furniture all deteriorating from June.

A major exception was auto sales, which jumped 12.3%, after falling 8.2% in June.

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Investment, on the other hand, has been driven by the rapid expansion of the real estate sector, with analysts predicting infrastructure spending to accelerate in the coming months thanks to government support.

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The Chinese economy returned to growth in the second quarter after falling sharply at the start of the year, but unexpected weakness in domestic consumption weighed on momentum.

Capital investment fell 1.6% in January-July compared to the same period last year, in line with expectations, but more slowly than a 3.1% drop in the first half.

Real estate investment in July grew at the fastest pace since April of last year, supported by strong construction activity and easier lending. New home prices rose at a slightly slower pace in July compared to the previous month.

Investment in infrastructure, a powerful engine of growth, fell 1.0% year-on-year, following a 2.7% decline in the first half.

“Once the floods are over, I believe construction work in the affected areas will boost capital investment and industrial production,” said Iris Pang, chief economist for Greater China at ING.

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(Additional reporting by Colin Qian; Editing by Sam Holmes)

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