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Chinese economic data points to slow cooling

Environmental crackdown, rising rates hit business activity in August

China's central and local governments are taking steps to tackle severe air pollution.   © Reuters

BEIJING -- China's economy began showing signs of a gradual slowdown last month as tighter environmental rules dented industrial output and rising market interest rates discouraged manufacturing investment.

Regulatory side effects

Year-on-year growth in industrial production slowed for a second straight month to 6% in August, government data released Thursday shows. Output declined across the board for such environmentally taxing products as aluminum, coke and cement. A nearly 1% rise in producer prices for industrial products owed to similar factors, with tougher environmental regulations pushing up prices for paper, chemical products and iron.

Cities are embracing the concept of development in harmony with the environment, National Bureau of Statistics spokeswoman Liu Aihua said. The central government plans to implement even stricter rules heading into winter, when air pollution tends to worsen. Some 170,000 businesses may be forced to halt production in the Beijing area alone.

A number of local governments, such as Sichuan Province, have taken steps of their own.

The head of a metal-processing company in Zibo, Shandong Province, committed suicide this month. Reportedly ordered by city authorities to shut down manufacturing facilities failing to meet tough new environmental standards imposed this year, the executive struggled with bank loan payments and employee wages. A number of other companies have also been forced to pay fines or halt operations at noncompliant facilities.

Tighter conditions

Investment was also lackluster last month as a rise in interest rates since the start of the year began crimping borrowing. Fixed-asset investment grew 7.8% on the year in the eight months through August, down 0.5 percentage point from the January-July period and the slowest rise since 1999. Spending on such infrastructure as roads and trains surged 20%, but investment by the manufacturing sector climbed just 4.5%.

Economic conditions are especially rough in the northeastern province of Liaoning. Companies there are so strapped for cash that they are turning to loan sharks for funds to repay bank loans, the head of the province's banking regulator told reporters late last month.

The People's Bank of China has not touched the policy lending rate since lowering it in October 2015, but a rise in market rates since last summer has businesses feeling squeezed. Lending at rates above the benchmark accounted for 64% of bank loans in June, central bank data shows -- the highest figure since October 2015. Loans below that rate accounted for just 16%, the lowest since that September.

Measures by local governments to rein in frothy property markets are also making an impact. Commercial square footage sold grew 12.7% on the year in the January-August period, down 1.3 point from January to July. The year-on-year rise for August alone clocked in at just 4%.

Still on track

That said, the current deceleration is likely within expectations for President Xi Jinping. Aggressive public-sector investment in infrastructure continues to shore up the economy.

With gross domestic product up 6.9% on the year in the six months through June, full-year growth is all but certain to beat the government's target of around 6.5%, barring an economic crisis of foreign origin.

China will "vigorously pursue reform and opening up, transforming the structure of the economy, and improving its health," Premier Li Keqiang told reporters Tuesday.

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