Published: Monday, 10 Aug 2009 | 11:27 PM ET

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China reported below-forecast growth in factory output and investment on Tuesday, underlining why senior officials keep reminding markets that recovery in the world's third-largest economy is not yet on solid ground.

Elizabeth Dalziel / AP ** FILE ** A Chinese worker pieces a garment together at her sewing machine at a wholesale garment factory in Beijing, in this April 18, 2005 file photo. China will drastically raise export tariffs on 74 categories of textile products beginning June, the government said Friday, May 20, 2005, in an apparent effort to meet U.S. and European demands to stem the flood of cheap Chinese goods. (AP Photo/Elizabeth Dalziel)

Analysts said the data suggested the economy was taking a breather after a blistering second quarter but that the government's goal of 8 percent growth this year remained within reach.

On the bright side, retail sales rose a surprisingly strong 15.2 percent in the year to July, showing that domestic consumption is helping to make up for a collapse in export demand, which has been a big growth driver in recent years.

"It is not compelling in either way," Ben Simpfendorfer, an economist at Royal bank of Scotland in Hong Kong, said of the data deluge.

"It certainly does not argue for an acceleration in recovery. In fact, I would suggest that it argues for some moderation, but I would not want to read too much into it."

Industrial output increased 10.8 percent in the year to July, a nine-month high and above June's 10.7 percent reading but below forecasts of 11.7 percent growth, the National Bureau of Statistics said.

"Overall, the trend of economic recovery is still clear. Although the pick-up in industrial output is below expectations, it still went up from June.

It is normal to see some swings in certain months, as we saw earlier this year," said Lian Ping, chief economist with Bank of Communications in Shanghai.

The Australian dollar dipped in response to the underwhelming factory output figures, as did the Shanghai stock market, which was showing a loss of 0.43 percent in mid-morning.

Investment in urban areas between January and July in fixed assets such as roads and power plants was up 32.9 percent from a year earlier, compared with a 33.6 percent increase in the first half of the year and forecasts of a 34.0 percent gain.

Retail sales rose 15.2 percent in the year to July, compared with a reading of 15.0 percent in June, which was also the forecast for the latest month.
  
Stuck in Deflation

Adjusted for price changes, retail sales volumes were stronger than the headline figures suggest because consumer prices fell 1.8 percent in the year to July, deeper than forecasts of a 1.7 percent drop, which was also the figure reported for the year to June.

Producer prices, those charged at the factory gate, were down 8.2 percent in the year to July -- in line with forecasts -- but rose 1.0 percent from June, the NBS said.

Officials and economists are relaxed about falling prices, which they say are a reflection of a high base of comparison in 2008. Indeed, measured from month to month, consumer prices have been steady or rising recently.

Beijing's 8 percent growth goal looked fancifully ambitious in the depths of the global slump. China's economy slowed to a crawl in the final months of 2008 and the first quarter of this year.

Now, thanks to a massive 4 trillion yuan ($585 billion) stimulus package concentrated on infrastructure and a record burst of lending in the first half by China's mainly state-owned banks, it will be a surprise if the 8 percent goal is not hit.

Year-on-year the economy expanded 7.9 percent in the second quarter. Compared with the first three months, the growth rate was an annualised 14.9 percent, according to the central bank.

Goldman Sachs on Monday raised its already bullish projection for 2009 growth to 9.4 percent from 8.3 percent and increased its forecast for 2010 to 11.9 percent from 10.9 percent.

No Change

Given the rapid recovery, financial markets have started to ask when the authorities will start tugging on the policy reins to avert the risk of asset price bubbles. The Shanghai stock market is up nearly 80 percent this year.

But the ruling Communist Party, which celebrates the 60th anniversary of its takeover of power on Oct. 1, is leaving nothing to chance as long as the global economy remains in the sick bay, depriving China of the export demand that has been a big driver of growth in the past few years.

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A parade of senior officials, culminating with Premier Wen Jiabao at the weekend, have said they will stick to a "proactive" fiscal policy and "appropriately loose" monetary stance until the solidity of the rebound is beyond doubt.

"China's policy will not change in the next two months. There will be some fine-tuning, as capital inflows will increase and the central bank needs to drain money out of the system," Lian, the Bank of Communications economist, said.

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