By Chao Deng 

BEIJING--China's economic expansion slowed a notch in the second quarter, weighed down by a top-priority government debt cleanup even before growth takes an expected hit from the trade fight with the U.S.

The economy grew 6.7% in the three months ended June from a year earlier, down slightly from 6.8% in the January-March period, the statistics bureau reported Monday. The pace was in line with market expectations. For the first half of 2018, the economy grew 6.8% from a year earlier.

While growth remains above Beijing's target of about 6.5% for the year, signs of a slowdown have been accumulating in recent months, with weakening investment in factories and infrastructure. Much of the tailing off has been attributed to Beijing's initiative to rein in risky borrowing and lending, which has made credit harder to come by for some businesses.

"We'll see a further slowdown in the second half--and credit risks," said Larry Hu, an economist with Macquarie Group. He said the effects from debt controls will linger and pointed to heavy-borrowing local governments and property developers as those likely to feel the squeeze from tighter credit.

With the trade battle with the U.S. poised to escalate, China's leadership is switching gears, easing off its campaign against risk and moving to support expansion. Last week, the central government gave the go-ahead to subway and other rail projects in urban areas that it had halted because of debt concerns. Commercial banks have also stepped up lending over the past month to spur business activity.

Even so, the trade fight is expected to be a drag on the economy, especially if it intensifies. China and the U.S. applied tariffs on $34 billion of each other's goods this month and levies on another $16 billion are in the pipeline. While the sums are small compared to the size of their economies, the Trump administration plans to assess 10% tariffs on $200 billion of other Chinese goods.

Economists estimate that the trade fight could shave 0.2 to 0.5 percentage point off China's GDP growth in the coming 12 months.

Statistics bureau spokesman Mao Shengyong, at a briefing Monday, said that "external uncertainties are increasing," though he played down the effect of the trade conflict, saying that any impact would be "relatively limited." He said the government is watching prices of soybeans and other agricultural goods and will counter any effects by expanding demand and stabilizing expectations.

Quarter-on-quarter, growth looked steadier, rising to 1.8% in the second quarter from the first, the statistics bureau said. The pace in the first quarter was 1.4%.

Still, signs of slowdown in the second quarter abound. Investment in buildings, factories and other fixed assets continued to weaken, rising 6.0% in the first half of the year, decelerating slightly from the 6.1% rate in the first five months. Mr. Hu at Macquarie and other economists estimate that spending on railways, highways and other infrastructure rose 3% over the six months, compared with 15% for the whole of 2017.

Industrial output grew 6% in June from a year earlier, markedly slower than the 6.8% pace in May.

Retail sales bucked the trend, rising 9.0% in June from a year earlier, compared with 8.5% in May, though in recent months household consumption has also shown signs of fading.

Adding to the headwinds, many exporters crammed orders into the first half of the year to beat the tariffs, suggesting that factory activity is likely to be more relaxed in the coming months.

Shanghai Grandware Industrial Co., which ships furniture, bedding and other consumer goods abroad, is preparing for a hit if the U.S. goes ahead with the new round of tariffs on $200 billion of Chinese goods, according to Cai Qihua, a manager at the firm. "The U.S. market is so big for us," he said. "It's hard to transfer [sales] to other markets."

Zhu Haibin, an economist at JPMorgan Chase & Co., estimates that nearly one million people in China's exports sector could lose their jobs if the tariffs on $200 billion in goods come to pass and damage business and investment confidence. Growth in exports could fall by 9 percentage points, he said.

Grace Zhu and Lin Zhu contributed to this article.

Write to Chao Deng at Chao.Deng@wsj.com

(END) Dow Jones Newswires

July 16, 2018 01:08 ET (05:08 GMT)