Shares in China posted their sharpest daily drop since February as concerns over slowing growth, as well as heightened fears of a UK exit from the European Union weighed on the stock market today. The health of China’s economy was back in focus on Monday following the release of key economic indicators.
Fixed-asset investment in urban areas rose by 9.6% on an annual basis between January and May, the lowest since 2000 and below expectations that it would stay unchanged at 10.5%. The most worrying aspect of the data was the decline in private investment, which slowed to 3.9% for the corresponding period from 5.2% between January and April. The shortfall was made up from increased government spending as more state infrastructure projects were approved in a bid by authorities to stimulate the economy.
This was evident in the latest industrial output figures, which benefited from the increased state spending. Industrial production rose by 6.0% year-on-year in May, unchanged from the previous month but above estimates of 5.9%.
Investment in real estate also suffered a slowdown, with the annual rate falling to 6.6% in May from 10.3% in April. This was the first slowdown in property investment since December as authorities have recently started to tighten lending following a credit surge in the first few months of the year.
Retail sales growth remained in double digits at 10.0% year-on-year in May but was slightly below forecasts that it would stay unchanged at 10.1%. The figure was boosted by a surge in online sales, which rose by 27.7% year-on-year between January and May.
China’s main share indices fell sharply when markets resumed trading on Monday following two days of public holidays on Thursday and Friday. The CSI 300 index closed down 3.1% and the Shanghai SE Composite index ended the day 3.2% lower. Today’s losses reversed sharp gains made at the end of May when shares had been lifted on hopes that the MSCI, which runs the influential MSCI global equity indices, would add Chinese shares to its index.
China’s currency, the yuan, also reacted negatively to the disappointing data, which added to today’s risk-off market sentiment. The People’s Bank of China set Monday’s midpoint at 6.5805 per dollar, 0.32% weaker from Wednesday’s fix. The yuan was last trading 0.4% weaker at 6.5850 per dollar in mid-European session.
Today’s data, in particular the weak investment figures, make it more likely that Chinese authorities will come up with further stimulus measures in the coming months. Although growth appears to be holding up, it is mostly being supported by increased lending, which the government is now trying to curb for risk of fuelling a debt crisis. Recent data has also been mixed, with exports continuing to decline on an annual basis in May, but imports showing some signs of stronger domestic demand. Most economists are forecasting that the PBOC will cut its one-year benchmark rate by 0.25% to 4.10% by the third quarter of this year.
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