China's Economy Weakens as Consumers Turn Wary Amid Outbreak

  • In Business
  • 2021-09-15 02:25:16Z
  • By Bloomberg

(Bloomberg) -- China's economy weakened further in August after the government imposed stringent measures to contain a widespread Covid-19 outbreak, curbing consumer spending and travel during the peak summer holiday break.

Retail sales growth slowed sharply to 2.5% from a year ago, lower than the 7% estimate in a Bloomberg survey of economists. Industrial output rose 5.3%, versus the median estimate of 5.8%. Fixed-asset investment in the first eight months of the year was largely in line with projections, rising 8.9%. The unemployment rate was unchanged at 5.1%.

Even before the delta variant outbreak from late July, consumers had been cautious to spend, failing to make a comeback to pre-pandemic levels. More recently, regulatory crackdowns in property and education services have weighed on consumer sentiment.

"Virus outbreaks and natural disaster have had its blow on the economy," the NBS said in a statement released with the data. While the economy continued to recover in August, "the international environment is complex and grim, and the impact from domestic virus outbreaks and natural disasters such as floods on the economy is showing," the bureau said. "The economic recovery still needs to be solidified."

New Outbreak

China's 10-year government bond futures extended gains, rising the most in two weeks. The CSI 300 Index pared its loss slightly after the data dump, down 0.6% as of 10:07 a.m. in Shanghai.

The virus control measures caused a slump in retail sales and spending on services last month as many people stopped going out to restaurants and shops and canceled holidays. The services sector contracted in August for the first time since early 2020, recent purchasing managers' surveys showed.

While China quickly brought the late-July outbreak under control, a new virus cluster has developed in southern China this month, suggesting consumers will remain cautious for longer.

Read More: Delta's Force Hits Economies from U.S. to China in Real-Time

The breakdown of retail sales data shows the impact of the virus controls: restaurant & catering contracted 4.5% in August from a year ago after climbing 14.3% in the previous month, while clothing sales were down 6%.

Policy Support

Manufacturers have had to deal with rising costs, disruptions caused by recent floods in some parts of the country, and the continued shortage of computer chips, which has been especially damaging for the car industry.

At the same time, global demand has remained strong, despite port congestion problems and high shipping costs. China posted record monthly export figures in August as U.S. and European buyers increased their orders before the Christmas shopping season.

With economic risks building, policy makers are ramping up support for smaller businesses, and pledging better use of local government bonds. Several economists expect the People's Bank of China to cut the reserve requirement ratio for banks again in coming months following a surprise reduction in July.

The PBOC maintained its measured policy approach Wednesday by rolling over its medium-term loans coming due rather than injecting more liquidity.

(Updates with market reaction and retail sales breakdown.)

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