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China July data: A new slew of misses

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China released a raft of disappointing economic data for July on Wednesday, adding to concerns about the world's second largest economy and raising expectations of further stimulus from the government.

Retail sales rose 10.5 percent in July from the year earlier, according to the National Bureau of Statistics, below the 10.6 percent rise forecast in a Reuters poll and following June's 10.6 percent rise.

Industrial output, meanwhile, grew an annualized 6.0 percent in the month, lower than expectations for a 6.6 percent gain and after a 6.8 percent uptick in the previous month.

In addition, fixed-asset investment, a key economic driver, expanded 11.2 percent in the first seven months of the year from the year-earlier period, missing estimates for a 11.5 percent gain and compared with a 11.4 percent gain seen between January and June.

"The data misses reflect the impact of the recent equity market crash, which reduced consumer spending power and diverted bank lending away from the real economy and into the government-orchestrated equity buying," said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole.

"With less lending to the real economy, investment slowed," he added.

Chinese equities suffered their worst month in almost six years in July, prompting the government to roll out a host of measures to bolster investor confidence, including establishing a market stabilization fund to put a floor under share prices.

July economic indicators are closely watched as they provide an insight into how growth momentum is faring into the second half of the year.

The Chinese economy grew 7.0 percent on-year in the second quarter, in line with the previous three months and a touch better than analyst forecasts.

Wednesday's data follows weaker-than-expected trade data published over the weekend, which showed exports sliding 8.3 percent on-year in July and imports slumping 8.1 percent.

"The government will need to do more to revive growth," said Kowalczyk.

"It seems like currency depreciation is one of the tools authorities are employing, but they will likely boost infrastructure spending and ease monetary policy further," he said.

The People's Bank of China surprised markets on Tuesday by devaluing the yuan by almost 2 percent and vowing to refer to more market-based valuations in setting the daily trading band for the closely-managed currency.

Li-Gang Lui, chief China economist at ANZ, shared a similar view to Kowalczyk. He warned that if conditions did not improve in the coming months, growth could fall below 6.5 percent in the July-September quarter.

"Fiscal policy will have to take a bigger role in H2. In fact, the State Council has recently reiterated to pursue proactive fiscal policy in its meeting at the end of July," Liu said.

"If government is still serious in reaching 15 percent fixed asset investment target, FAI investment growth should reach 18.6 percent in H2, led by infrastructure investment in the coming months."