China’s factory production and retail sales growth slowed in July, falling short of expectations. Industrial output increased by 5.7% compared to last year, down from June’s 6.8%, marking the weakest growth since November 2024. Retail sales growth also dropped to 3.7% from 4.8%. Both industrial output and retail sales were below forecasts. Fixed asset investment grew by only 1.6% from January to July, while a rise of 2.7% was expected. These results pose challenges for Beijing due to weak domestic demand and global issues.

Economic Challenges Facing China

This data comes as China faces pressure from US trade policies and low domestic consumption. A decline in factory prices, with the producer price index down by 3.6% in July for the second month in a row, adds to the troubles. Authorities are taking steps to boost spending and reduce competition to reach their 2025 growth target of around 5%. Even though a trade truce between the US and China has eased some tension, analysts remain cautious. Weak demand, global uncertainty, and recent disruptions from extreme weather are potential threats to China’s economic growth in the coming months. With disappointing data from July, we believe the economic slowdown in China is a long-term trend rather than a temporary setback. The shortfalls in industrial output and retail sales show that domestic demand is struggling to improve. This suggests a negative outlook for assets related to Chinese growth in the upcoming weeks.

Market Implications of China’s Economic Slowdown

The economic weakness is being reflected in currency markets, as the offshore yuan has dropped past the 7.40 mark against the U.S. dollar for the first time this year. The People’s Bank of China’s cautious 10-basis point rate cut last week did not help restore confidence. We expect further pressure on the yuan, making strategies that profit from its decline appealing. The drop in factory activity poses a risk to industrial commodity prices. Iron ore futures on the Dalian exchange have fallen to around $105 per tonne, as factory price cuts indicate that manufacturers are reducing prices and lowering orders for raw materials. Considering short positions on copper and other base metals could be wise as this trend continues. For equity traders, this situation suggests renewed challenges for the Hang Seng and mainland indexes, similar to the difficulties experienced during the 2023-2024 period. With consumer and business confidence low, stimulus efforts may not be able to spark a rally. Thus, buying put options on broadly China-focused ETFs could serve as a good hedge or speculative short position. Create your live VT Markets account and start trading now.

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