China’s Bet on Manufacturing Ups Risks From Trade Battle With US

(Bloomberg) — China’s economic recovery tilted even further toward manufacturing, leaving it more vulnerable to trade barriers and highlighting the stakes of a new bid to shore up domestic demand.

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Growth in consumer spending unexpectedly cooled to 2.3% in April, the slowest pace since 2022, while industrial output rose from a month ago to a faster-than-expected 6.7%, the National Bureau of Statistics said Friday.

China’s unbalanced recovery was led by improvements in exports and manufacturing, which could be hobbled by mounting trade tensions with the US and Europe. Meanwhile, the property sector deteriorated across the board. Beijing on Friday announced new plans to shore it up, easing rules for borrowers and pledging public funds to purchase homes.

Read More: China Removes Mortgage Rate Floor for Individual Homebuyers

“The trade frictions will make the sustainability of this export-driven recovery model very problematic,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. “At the end of the day, China has to boost domestic demand.”

Chinese property shares rallied on the new mortgage and down payment rules, pushing the onshore benchmark CSI 300 Index to rise 1%. The Hang Seng China Enterprises Index was up 0.8% as of 3:04 p.m. local time.

The Communist Party’s focus on ramping up China’s new energy sectors has stoked complaints from the US and European Union that a deluge of cheap goods are threatening jobs in their domestic markets. The Biden administration has unveiled a 100% tariff on electric vehicles and other exports Beijing deems as its new growth drivers.

As a drawn-out housing crisis weighs on sentiment, President Xi Jinping’s government has signaled more support to boost demand.

The central bank on Friday removed the floor on mortgage rates and lowered the minimum down payment ratios for individual homebuyers. The government is also mulling a plan for local authorities to snap up millions of unsold homes, Bloomberg earlier reported, after top leaders previously vowed to study measures to reduce inventory.

In the meantime, Beijing started selling its 1 trillion yuan ($138 billion) ultra-long special sovereign bonds Friday, which could fund infrastructure spending critical to growth. That’s spurred expectations of monetary easing to help banks buy the notes.

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China’s manufacturing sector, bolstered by robust foreign demand and favorable government policy, has powered the country’s recovery this year. Exports returned to growth in April. But consumer prices remained sluggish and credit shrank for the first time since 2005.

“My biggest takeaway is that China is having a two-speed recovery,” said Larry Hu, head of China economics at Macquarie Group Ltd. He said the mixed data may spur the government to step up support on the margin but won’t lead to any major shift.

NBS spokeswoman Liu Aihua attributed the slowing indicators to base and seasonal effects. “New growth drivers are maintaining a fast growth and the economy continued its recovering and improving trend,” she said at a briefing.

But the bureau also cited the “increasingly complex, grim and uncertain” external environment among challenges ahead and called for the early implementation of existing macroeconomic policies.

The anemic consumption growth may give Beijing reason to speed up a plan to encourage companies and households to upgrade their machines and appliances. Authorities began to roll out modest subsidies late last month across cities, including some to help fund car purchases.

“The effect of the new-for-old program for consumer goods is yet to kick in,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle Inc., adding that the uncertain economic outlook may deter spending. “In general, consumers’ expectations are yet to turn the corner.”

Auto sales were one of the biggest drags on spending, sliding 5.6% from a year earlier in the deepest single-month drop in almost two years. China’s carmakers are engaged in a price war that may be encouraging consumers to delay purchases.

Some economists argue the success of any government drive to lift consumer sentiment will hinge on whether it can halt the property slump and stabilize expectations on housing prices.

Jacqueline Rong, chief China economist at BNP Paribas SA., cautioned that the scale of government purchases of unsold housing could be limited given the trial programs being carried out in some cities. She also said authorities may not be able to take over bigger homes as the program is meant for social housing.

“I feel investors shouldn’t have overly high hopes pinned on the central government’s measures,” Rong said.

Other data released Friday:

• Fixed-asset investment grew 4.2% in the first four months of year, slowing from the previous numbers.

• Investment in property development plunged 9.8%.

• The urban jobless rate was 5%, down from 5.2% as of the end of March.

• Sales of clothing, shoes, hats and textile declined 2% from a year earlier, the first monthly contraction since the end of 2022.

(Updates throughout with more context and comments)

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