BEIJING--Economic activity in China cooled further in August, testing Beijing's tolerance for slower growth as it seeks to ease trade tensions with the U.S.

Softness was visible last month in nearly every aspect of the Chinese economy, with industrial output and retail sales data pointing to sluggish demand and low confidence among businesses and consumers. Economists had been expecting economic activity to have recovered a little from July, when it fell to its lowest level in more than a decade.

Value-added industrial output in China rose 4.4% in August from a year earlier, far below economists' expectations of 5.2% growth and slower than the 4.8% increase in July, the National Bureau of Statistics said Monday.

Fixed-asset investment outside Chinese rural households climbed 5.5% in the January-August period from a year earlier, slightly below expectations. Retail sales in China rose 7.5% in August from a year earlier, a tick down from the 7.6% gain in July and below expectations for a 7.9% rise.

With the latest economic numbers, Beijing is now at risk of a vicious cycle, said Li Wei, an economist at Standard Chartered Bank, who warned of deflationary pressure on companies as soft demand squeezes profits, leading to destocking and reduced investment.

"It's now all about the government's tolerance for slower growth and what kind of policy tools they want to use to stimulate growth," Mr. Li said.

For now, China's leaders have adopted a measured tone. Premier Li Keqiang said China's economic performance in the first eight months of 2019 was steady overall, with some signs of progress, according to a statement posted on the government's main website Monday.

"Against the backdrop of a complicated international situation and given the higher base of comparison, it is not very easy for China to still sustain a medium-to-high growth speed of above 6%," the premier was quoted as saying ahead of a visit to Russia. "Such a speed still ranks high among the world's major economies."

Fu Linghui, a statistics bureau spokesman, also partly attributed disruptions to business operations on powerful storms and other temporary factors.

Mr. Fu said the government remains confident that it can meet its goal of keeping growth within a range between 6% and 6.5% this year. China's economy expanded 6.3% in the first half of the year.

Many economists have said they expect growth to slow further from the second quarter's 6.2%, with some forecasting third-quarter growth below the lower bound of Beijing's target range.

"Given the much weaker economic data in August, it's quite difficult for the Chinese economy to maintain growth of more than 6% in the third quarter," said Zhaopeng Xing, an economist with ANZ.

China in recent weeks has stepped up efforts to halt an economic slowdown, providing extra support for local-government bond issuance and releasing more funds for banks to lend to businesses.

Many economists, including those at Standard Chartered and ANZ, expect the central bank to lower key market rates this month, not only to bring down borrowing costs but also to send a strong message that Beijing is willing to support its economy.

Rising expectations for lower interest rates boosted Chinese bond prices, which move conversely with yields.

The property market was one of the few bright spots in August. Home-sales growth in China was resilient in August, accelerating even as Beijing continued to tightly control property purchases.

Home sales by value for the January-August period rose 9.9% from a year earlier, higher than the 9.2% gain for the first seven months of the year.

Developers' aggressive promotion campaigns and home-buyers' fears of further tightening measures led to the increase in real-estate transactions, said Yan Yuejin, an analyst at property services firm E-House China R&D Institute.

Real-estate investment, however, will probably slow in the coming months as pessimism about the property market's outlook and a cooling economy sets in among developers, Mr. Yan said.

Another silver lining was the unemployment rate, which is based on an official survey in China's large cities. edged down to 5.2% from July's 5.3%--a reading that was tied for the highest level since the government began publishing the data last year.

The general economic picture could also improve if trade tensions between China and the U.S. continue to ease. Both Washington and Beijing have recently made some goodwill gestures to ease bilateral trade tensions.

China said Friday that it would exempt purchases of U.S. soybeans, pork and other agricultural products from punitive tariffs, a move that appears aimed at addressing one of President Trump's most pressing demands during the protracted trade war.

Liyan Qi, Grace Zhu, Lin Zhu

(END) Dow Jones Newswires

September 16, 2019 02:44 ET (06:44 GMT)