Trade war with US heavily taxes China’s economy; industrial output lowest in 17 years

China’s economy stumbled more sharply than expected in July, with industrial output growth cooling to a more than 17-year low, as the intensifying US trade war took a heavier toll on businesses and consumers.

Activity in China has continued to cool despite a flurry of growth steps over the past year, raising questions over whether more rapid and forceful stimulus may be needed, even if it risks racking up more debt.

After a flicker of improvement in June, analysts said the latest data was evidence that demand faltered across the board last month, from industrial output and investment to retail sales.

That followed weaker-than-expected bank lending and gloomy factory surveys in recent days, along with the return of producer price deflation, reinforcing expectations more policy support is needed soon.

“China’s economy needs more stimulus because the headwinds are pretty strong and today’s data is much weaker than consensus,” said Larry Hu, head of Greater China economics at Macquarie Group in Hong Kong.

“The economy is going to continue to slow down. At a certain point, policymakers will have to step up stimulus to support infrastructure and property. I think it could happen by the end of this year.”

Industrial output growth slowed markedly to 4.8% in July from a year earlier, data from the National Bureau of Statistics showed, lower than the most bearish forecast in a Reuters poll and the weakest pace since February 2002.

Analysts had forecast it would slow to 5.8%, from June’s 6.3%. Washington had sharply raised some tariffs in May.

Infrastructure investment, which Beijing has been counting on to stabilise the economy, also dropped back, as did property investment, which has been a rare bright spot despite worries of potential housing bubbles.

Crude steel output fell for a second straight month, while production of motor vehicles continued to fall by double digits. Hi-tech manufacturing output rose by a slower 6.6%, and the country’s power output edged up just 0.6%.

The industry ministry said last month that China would need “arduous efforts” to achieve its 2019 industrial growth target of 5.5% to 6.0%.

ESCALATING TRADE WAR

Recent months have been marked by a sudden escalation in the year-long US-China trade war that has raised risks for both economies and sparked fears of a global recession.

A brief ceasefire was shattered earlier this month after US President Donald Trump vowed to impose a 10% tariff on more Chinese goods from September 1.

China let its yuan currency slide to an 11-year low days later, promng the US Treasury Department to label Beijing a currency manipulator.

Some relief came on Tuesday, however, after Trump said he would delay duties on some Chinese imports including cellphones and other consumer goods, in an apparent effort to blunt tariffs’ impact on US holiday sales.

Still, new tariffs will go into effect next month on about half of Washington’s $300 billion target list of Chinese goods, and analysts say the chance of any durable trade deal after the recent escalations have sharply receded.