July 15, 2018 / 11:08 PM / a month ago

As China's second quarter GDP growth looks set to cool, trade battle looms as biggest risk

BEIJING (Reuters) - China is expected to report a modest slowdown in second-quarter economic growth on Monday, as the government’s efforts to tackle debt risks crimp activity and a trade war with the United States threatens exports.

A worker looks on as a crane lifts steel pipes for export at a port in Lianyungang, Jiangsu province, China July 15, 2018. REUTERS/Stringer

Analysts polled by Reuters expect gross domestic product (GDP) to have grown 6.7 percent year-on-year in the April-June period, cooling from the first quarter’s 6.8 percent expansion.

The world’s second-largest economy has already felt the pinch from a crackdown on riskier lending that has driven up corporate borrowing costs, promoting the central bank to pump out more cash by cutting reserve requirements for lenders.

Recent data have started to show signs of fatigue as credit expansion slowed and domestic demand ranging from government-funded infrastructure investment to consumer spending looked to be softening.

A better-than-expected GDP reading would likely provide some relief for Chinese stocks and the yuan CNY=CFXS, which have been roiled in recent weeks as the China-U.S. trade tensions intensified.

Data on Friday showed China’s trade surplus with the United States swelled to a record in June as its overall exports grew at a solid pace, a result that could further inflame the bitter trade dispute with Washington.

The administration of U.S. President Donald Trump has raised the stakes in its trade row with China, saying it would slap 10 percent tariffs on an extra $200 billion worth of Chinese imports, including numerous consumer items. The fresh threats came only days after both nations slapped tit-for-tat duties on $34 billion worth of each other’s goods.

MODEST SLOWDOWN

Analysts expect the trade tussle between the world’s top two economies to take a toll on China’s export machine in the second half of 2018, dragging on overall economic growth.

Workers are seen silhouetted at a construction site of Fuchimen Bridge in Zhoushan, Zhejiang province, China July 14, 2018. Picture taken July 14, 2018. REUTERS/Stringer

“Looking ahead, we think export growth will cool in the coming months as US tariffs start to bite alongside a broader softening in global demand,” analysts at Capital Economists said in a note.

“That said, the slowdown may not be abrupt as some fear given that these drags should be partly offset by a weaker renminbi (yuan).”

China’s economy is likely to experience a mild slowdown in the second half of the year as financial market risks become “obvious” and demand is expected to decline, official think tank State Information Center (SIC) recently said.

Faced with a slowdown in domestic demand and the potential fallout from the trade war, Chinese policymakers are likely to step up policy support for the economy and soften their stance on deleveraging.

The People’s Bank of China (PBOC), which has cut banks’ reserve requirements three times this year, has recently replaced its use of the term “deleveraging” with “structural deleveraging”, a change that suggests less harsh curbs on debt.

“Given that much of the current downward pressure on the economy is coming from tightening financial regulations and credit, especially on local government financing and infrastructure, we think the government will likely adjust the pace of domestic tightening as a first reaction to the now escalating trade war,” UBS China economist Tao Wang said in a note.

Nomura economists said in a recent note they expected the PBoC to deliver at least one more RRR cut before year-end, likely by 100 basis points and increase direct funding to the real economy via other liquidity injection tools, such as the supplementary lending facility.

China releases second quarter GDP on Monday, along with June industrial output, retail sales, property sales and

investment, and fixed asset investment data.

Economists in the poll estimated GDP grew 1.6 percent quarter-on-quarter, versus 1.4 percent in the first

quarter.

Reporting by Kevin Yao; Editing by Shri Navaratnam

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