China Industrial Output Growth Holds Steady in May -- Update

A snapshot of China's economy in May showed some success for Beijing in its bid to prevent growth from declining too rapidly in an important political year.

Industrial output, a rough proxy for economic growth, rose 6.5% in May from a year earlier, matching April's pace, the National Bureau of Statistics said Wednesday. The increase slightly beat a forecast for a 6.4% rise by 11 economists surveyed by The Wall Street Journal.

Retail sales grew 10.7% in May from a year earlier, the same as in April. Fixed-asset investment in urban areas climbed by 8.6% in the first five months of 2017 from a year earlier, slowing from an 8.9% increase in the January-April period.

China's bid to engineer a gradual slowdown has been helped by a still-robust property market, solid consumption and trade, while factory inflation, industrial output and industrial profits have weakened.

"The data shows that the economy at this moment is relatively stable," said Macquarie Group Ltd. economist Larry Hu. "But I think it will slow in the third quarter, causing policy makers to shift their focus to growth from financial restructuring."

Beijing continues to walk a fine line as it tries to stem financial excess and real-estate speculation without seeing growth fall off too rapidly in the real economy. Hitting the brakes too hard could increase unemployment and spur political instability in advance of a Communist Party congress this fall when top leaders are chosen in a meeting held once every five years, they add.

Some companies on the front lines are already feeling a chill. Steel prices have declined 20% since April, undercutting profits and squeezing cash flow, according to the state-owned Baogang Group, based in the northern city of Baotou. The company also faces something of a dilemma, said company director Hao Zhizhong: While the central government wants steel companies to limit overcapacity, local governments want firms to help spur economic growth.

"If prices drop too much, we can end up losing money on every ton we produce," Mr. Hao said.

Interest rates paid by Chinese firms on their loans after accounting for inflation increased to 4.23% in May from 3.1% at the end of 2016, eating into profit margins, Citibank said in a report. Economists are watching to see how Beijing responds to an expected Federal Reserve decision Wednesday to raise U.S. interest rates, which could prompt China to raise its own rates to stem capital outflows.

In a bid to boost private investment and reduce companies' financial burden, Beijing last week announced a reduction in corporate fees and some taxes, but economists say China continues to heavily favor state-owned firms. In its latest survey, the World Bank ranked China 78th of 183 economies in its ease-of-doing-business index, behind Tunisia.

Retail spending in China continues to outpace industrial production and overall economic growth. But economists warn that tighter property restrictions in coming months could blunt spending on furniture and house renovations.

Property investment and sales decelerated modestly in the first five months of 2017 compared with the January-April period. Liu Aihua, a spokeswoman with the statistics bureau, said quality is more important than quantity in assessing China's investment data, which remains quite stable.

Economists expect investment to slow in the coming months as aggressive public infrastructure spending decelerates, the property market weakens and financing costs rise. Government spending ebbed in May. "With a relatively stable economy, it makes no sense for policy makers to waste their ammunition now," Mr. Hu said.

Slower growth ahead could put pressure on local officials to make their numbers. Discipline inspectors said in a statement Sunday without providing details that some local governments and companies in northeastern Jilin province faked their economic data.

Pei Li and Liyan Qi contributed to this article.

Write to Mark Magnier at mark.magnier@wsj.com

(END) Dow Jones Newswires

June 14, 2017 01:58 ET (05:58 GMT)