By Jonathan Cheng 

BEIJING--China continued to build on its post-coronavirus recovery in July, though momentum cooled slightly as challenges at home and abroad piled up and Beijing eased off stimulus measures.

China's factories continued to lead the recovery last month, though the 4.8% expansion in industrial production from a year earlier, matching June's increase, undershot economists' expected 5.0% increase, according to data released Friday by the National Bureau of Statistics.

Perhaps more worrying, China's retail sales, a closely watched gauge of consumption, remained in negative territory in July, defying expectations for a second straight month of a return to pre-coronavirus levels following the resumption of business at restaurants and retail stores across the country, which began in April.

For July, retail sales fell 1.1% from a year earlier, a narrower decline than June's 1.8% year-over-year drop but missing economists' projection for retail sales to finally match last year's levels. With July's disappointment, retail sales have recorded negative growth every month this year.

Taken together, Friday's data release suggested to some economists that China's rebound may have already seen its best days after the second quarter's better-than-expected 3.2% expansion in gross domestic product.

"It's just one month, but it's consistent with the idea that the snapback we got in the second quarter is not going to be repeated," said Michael Spencer, head of Asia-Pacific research for Deutsche Bank in Hong Kong.

The investment bank had forecast Chinese retail sales to grow by 1% in July, but Mr. Spencer noted that while retail sales for goods have bounced back fully, lingering public-health concerns continue to hold back restaurants and other services.

"We have to recognize that when you don't allow cinemas to open, and tell people you should avoid restaurants, you should expect that those parts are going to necessarily lag," Mr. Spencer said. "Demand couldn't recover because people were told to be careful."

After posting a sharp contraction in gross domestic product for the first three months of the year because of stringent lockdown measures, China emerged as the only major global economy to post year-over-year growth in the second quarter.

Friday's data, though slightly missing projections, shows that the recovery in the world's second-largest economy remains on track, said Ding Shuang, an economist at Standard Chartered. Even so, Mr. Ding warned: "It's hard for the growth rate to accelerate further."

Though he has projected Chinese economic growth to rebound to roughly 6% in the second half of the year, Mr. Ding says Beijing still has to address some structural issues to make the recovery more sustainable.

China's urban unemployment rate, its main official gauge of joblessness, hovered unchanged at 5.7% in July, with hiring conditions for young workers worsening further, the statistics bureau said Friday, without offering a more specific breakdown of the data. In June, the jobless rate for college graduates jumped to 19.3%.

The higher jobless rate, coupled with stagnating income for many Chinese citizens, threatens to exert more pressure on the consumer sector, whose recovery has lagged behind that of other economic drivers this year.

Even so, there were some bright spots. China's fixed-asset investment dropped 1.6% in the January-July period compared with the year-ago period, narrower than the 3.1% decline in the first half of the year and a touch better than economists' estimates.

Investment in the property sector, which has rebounded quickly amid credit easing, accelerated its year-over-year growth rate to 3.4% in the first seven months of 2020, while home sales for the first time this year moved into positive territory by growing 0.4% in the January-July period from a year earlier.

Though falling short of market expectations, China's factory production and retail-sales figures enjoyed a boost from the recovering auto sector in July, with both vehicle production and sales growing strongly, official data showed.

With the recovery on firmer footing, China's central bank signaled last week that it would ease off its looser post-coronavirus monetary policy, in a bid to curb speculation in the country's property and stock markets. Both bank and nonbank credit were scaled back sharply in July, according to data released Tuesday, as financial regulators moved to rein in rising debt risk.

Raymond Yeung, an economist at investment bank ANZ, said that while the central bank has retreated somewhat from its earlier easing mode, the People's Bank of China remains a long way away from tightening its policy stance, given the challenges the economy is still facing in the remaining months of the year.

The intensifying U.S.-China rivalry, in particular, has cast a cloud over Beijing's economic outlook despite better-than-expected export data in recent months, as economists question how long the resilience in outbound shipments can continue amid a resurgence of coronavirus infections and a more hostile business environment for Chinese companies in many developed Western countries.

In recent weeks, Chinese leader Xi Jinping and other senior officials have talked up the importance of relying more on the domestic market as its relationship with many Western economies sour.

Grace Zhu and Bingyan Wang contributed to this article.

Write to Jonathan Cheng at jonathan.cheng@wsj.com

(END) Dow Jones Newswires

August 14, 2020 02:49 ET (06:49 GMT)