China’s economy grew at its slowest pace in almost three decades in the second quarter as the trade war with the US took its toll on exports.

But resilient domestic consumption meant Beijing was able to avert a deeper slowdown, giving Chinese President Xi Jinping some leeway as he tries to negotiate an end to the dispute with the US. 

GDP grew at 6.2 per cent year on year, the National Bureau of Statistics said on Monday. The figure, which was in line with most analysts’ expectations, was the slowest since the NBS began calculating its current series of GDP data in 1992, at the beginning of China’s long bull runChina reported 6.4 per cent growth in the first quarter and 6.6 per cent for full-year 2018.

Tax cuts enacted earlier in the year helped boost the domestic economy, offsetting the problems with trade, NBS spokesman Mao Shengyong told reporters on Monday. “China’s economic growth is more and more reliant on domestic demand, especially on consumption,” Mr Mao said. 

The CSI 300 index of Shanghai and Shenzhen-listed stocks pared earlier losses to trade 0.9 per cent higher after the release of the data, while Hong Kong’s Hang Seng benchmark gained 0.2 per cent.

The softening economy follows a period of tumultuous relations with Washington. The two countries have threatened and imposed new rounds of levies on each other’s goods, but agreed to a truce after a meeting between US President Donald Trump and Mr Xi last month at the G20 summit in Osaka. 

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With fears growing that the trade war will dent China’s formidable export industry, Beijing has maintained a loose monetary policy and introduced industrial policies meant to stimulate investment. Nonetheless, some economists in China had expected an even lower number of about 6 per cent growth in the second quarter. 

Most of the weakness in second-quarter GDP came from exports, which contracted in June, and from declines in housing construction and other indicators of investor sentiment.

“We see more weakness on the horizon,” said Julian Evans-Pritchard, China economist at Capital Economics.

Yet domestic growth proved more robust than many had expected, with retail sales and industrial output both strengthening. “Income growth was good, as was consumer spending — and this has been the case all year,” said Andy Rothman, investment strategist at Matthews Asia. 

“Chinese consumers are not panicking about the tensions with Trump.” 

The strong showing of the domestic economy helps bolster Beijing’s argument that growth is robust enough to withstand a prolonged trade war with its top export market. “Both sides have shown their strength — US has produced a strong economic outcome and China has shown its strong control over the economy,” said Zhou Hao, analyst at Commerzbank in Singapore.

China’s headline GDP numbers are heavily “smoothed out” for political purposes, and to meet Beijing’s goal of doubling the size of its economy by 2020 compared with 2010, analysts say. Even so, the figure is watched globally as an indication of the strength of the Chinese economy, the world’s second-largest. 

Growth in nominal GDP, which is not adjusted for inflation but is also less subject to “smoothing” by NBS statisticians, ticked up compared with the first quarter, according to FT calculations.

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Chinese economic growth plummeted in the aftermath of the 1989 crackdown on pro-democracy protests in Tiananmen Square, but recovered and began its long period of expansion after Deng Xiaoping’s “southern tour” of 1992. The real economy also slowed sharply during the Asian financial crisis of the late 1990s and in the aftermath of the global financial crisis of 2008. 

Growth in property investment moderated to 10.9 per cent in the first six months, compared with 11.2 per cent in the year to May. Strong property sales helped brighten the economy in April but the sector lost momentum in the second quarter.

However, manufacturing, another key growth driver, perked up. Industrial output grew 6.3 per cent annually in June, compared with 5 per cent growth in May.

Retail sales growth strengthened to 9.8 per cent in June from 8.6 per cent a month earlier, an encouraging sign that domestic consumption has remained robust. Retail sales stayed strong throughout the second quarter, as non-food inflation remained modest.

“The central government has been prepared psychologically and practically for downward pressure,” said Lu Xiang, an expert on Sino-US relations at the state-backed Chinese Academy of Social Sciences, calling the first half data “surprisingly good”.

“We’ve always had bargaining room in the trade talks with the US. We are not prepared to make additional concessions just because we are facing downward pressure.”



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