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China's GDP growth slows to 6.7% in 2nd quarter amid trade war

Recent tariffs expected to show bigger impact in second half of 2018

Beijing's central business district. China’s efforts to bring down the country’s debt levels also contributed to the slowdown during the second quarter.   © AP

HONG KONG -- China's economic growth slowed to 6.7% in the second quarter, amid fears of a full-blown trade war with the U.S. began taking their toll on the world's second-largest economy.

The figure for the April to June period -- largely in line with market expectations -- is slightly slower than the 6.8% gain in the first quarter, but still above the government's full-year growth target of 6.5%.

Beijing's escalating efforts to bring down the nation's debt levels also contributed to the slowdown during the period, which had pushed up borrowing costs for companies and suppressed economic activity, analysts said.

"The GDP figure is largely in line with my expectation," said Liao Qun, chief economist at Citic Bank International.

While Liao said the impact of trade tensions between the world's two largest economies has not been reflected in the statistics in a significant way, it has started affect business confidence as seen by weaker exports and direct investment data during the period second quarter.

"The trade war will have a bigger impact on GDP growth in the third and fourth quarters," he said, following the recent implementation of tariffs imposed by Beijing and Washington on each other's goods. However, Liao expects the scale of current tariffs will only drag down full-year GDP by 0.1 percentage point, as the central government has many policy tools to use to meet its target.

Stock market benchmark indexes in Hong Kong and mainland China fell on Monday morning following the GDP report. The Hang Seng Index down 0.2% to 28,470.67, in late morning trading, while the Shanghai Composite Index was down 0.5% to 2,817.75 and the Shenzhen Stock Exchange Composite Index had slipped less than 0.1%.

As trade tensions between the two countries deepen, the administration of U.S President Donald Trump on July 6 put into force tariffs of 25% on $34 billion worth of Chinese goods. China, taking tit-for-tat counter-measures, immediately imposed tariffs on the same value of U.S. goods.

Just days after the moves, the U.S. announced it would slap 10% tariffs on an additional $200 billion worth of Chinese imports that could take effect in September or October.

"The macro impact could hit the Chinese economy earlier than we had expected, but it is still manageable in our view," Haibin Zhu, chief China economist and head of China equity strategy at J.P. Morgan, said in a research note.

He expects a 0.2 percentage point drag on full-year GDP growth through trade channels if the $200 billion in tariffs takes effect. It could increase tariffs on Chinese imports on average by 6.5% and reduce exports to the U.S. by 8.6%, he said.

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