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China’s factory output sputters

China’s factory output growth slowed unexpectedly in July to its weakest in more than three years, underlining stiff global headwinds that may prompt policymakers to take more action to keep growth on track to meet a 7.5 per cent annual target.

Retail sales and fixed-asset investment also missed market forecasts in official data released on Thursday, increasing expectations that Beijing will act to support an economy that has seen growth sliding for six straight quarters.

Annual consumer inflation, meanwhile, fell to a 30-month low last month, suggesting that the central bank has ample scope to ease policy further after cutting interest rates in June and July.

“We think the weakness will be more stubborn than people had expected,” said Li Wei, China economist at Standard Chartered Bank in Shanghai. “My view is that political rhetoric is losing its effectiveness in boosting confidence and you need actual actions to boost growth.”

Expectations of more stimulus measures in response to the data boosted riskier assets, with Asian shares rising to a three-month high and the commodity-sensitive Australian dollar testing a 4-1/2-month peak.

Apart from lowering interest rates, Beijing has also cut the amount of cash that banks must hold as reserves to free up an estimated 1.2 trillion yuan ($191 billion) for lending in a series of moves since November 2011. President Hu Jintao and Premier Wen Jiabao have promised to step up policy “fine tuning” in the second half of the year to support the economy.

The central bank is widely expected to continue its gradual policy easing in the coming months to support growth, despite its recent warning that inflation may pick up after August. —