BEIJING--China's economy is starting to feel pain from Beijing's monthslong effort to curb debt, with business activity slowing and the central bank deciding to not follow the U.S. Federal Reserve in adjusting interest rates.
Across the board, business activity from investment to retail sales slowed in May, official data released Thursday showed, suggesting that the world's second-largest economy is facing growing headwinds.
Meanwhile, the People's Bank of China left a suite of key short-term interest rates unchanged, forgoing a tactic used previously after the Federal Reserve raised interest rates, as it did Wednesday for the second time in 2018.
The disappointing economic data "warranted China to take a cautious tone, " said Tommy Xie, an economist at OCBC Bank. He said the pause in rate increases signals that the central bank is likely returning to a neutral stance to safeguard financial risks.
Since last year, Beijing has been trying to control the swell of debt accumulated by companies and local governments that economists warn could derail the economy long-term. As part of that effort, the central bank has been tweaking rates to discourage riskier lending while trying not to tank growth. While the economy has hummed steadily for much of the time, there are gathering signs of a slowdown, including in Thursday's data.
Investment in buildings, factories and other fixed assets, outside rural households, rose 6.1% in the January-to-May period from a year earlier, decelerating from 7% in the first four months and a pace unseen since late 1999. Retail sales in China climbed 8.5% in May from a year earlier, slowing from a 9.4% on-year increase in April.
Value-added industrial output in China rose 6.8% in May from a year earlier, moderating from a 7.0% on-year increase in April. All three indicators came in lower than median forecasts by economists polled by The Wall Street Journal.
Adding to the uncertain outlook is a looming trade war with the U.S. The Trump administration is preparing to move ahead with planned tariffs on tens of billions of dollars of Chinese goods in the coming week, perhaps as early as Friday, and the Chinese government has promised to retaliate.
Faced with a domestic slowdown and a potential fallout of a trade war, the central bank appears to be adjusting the pace and method of the deleveraging campaign, said Ting Lu, an economist at Nomura International.
The PBOC left the rates on reverse repurchase agreements, or reverse repos, used for open-market operations for the 7-day, 14-day and 28-day tenors unchanged at 2.55%, 2.70% and 2.85%, respectively.
The central bank raised short-term interest rates following two of the Fed's three rate increases last year, as well as after its rate increase earlier this year. The PBOC has left unchanged the benchmark one-year lending and deposit rates, China's official policy interest rates, since October 2015, to avoid the kind of broad credit-easing likely to fuel riskier lending and add to debt.
Breaking from its previous increases signals more policy easing, said Nomura's Mr. Lu. He anticipates faster fiscal spending, more reductions in the amount of reserves banks are required to set aside and greater approvals of public-private partnerships to spur investment and boost growth.
China's banking and insurance regulator on Thursday said authorities are paying attention to the "holding capacity" of the financial system's ability to cope with the deleveraging campaign.
"Preventing and resolving financial risks is not only a hard battle but also a long-lasting war," Guo Shuqing told a forum in Shanghai. He said regulators are determined to punish rule breakers while sustaining credit to firms in need, including the country's smallest ones.
Liyan Qi and Grace Zhu in Beijing, James T. Areddy in Shanghai
(END) Dow Jones Newswires
June 14, 2018 02:39 ET (06:39 GMT)
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