March 14, 2017 / 2:50 AM / in 4 months

UPDATE 1-China Jan-Feb factory, investment beat forecasts but retail sales disappoint

4 Min Read

BEIJING, March 14 (Reuters) - China's factory output and fixed-asset investment grew more strongly than expected in the first two months of the year, but retail sales disappointed after the government reduced a tax break on small cars.

Industrial output rose 6.3 percent in January-February from the same period a year earlier, fixed-asset investment 8.9 percent and retail sales 9.5 percent.

The overall readings are likely to reinforce views that the world's second-largest economy is on a steady growth path, despite worries about the risks of slightly tighter credit policy this year and a surge in U.S. trade protectionism.

China combines January and February activity data in a bid to smooth out seasonal distortions caused by the timing of the long Lunar New Year holidays, which began in late January this year but fell in February last year.

Analysts polled by Reuters had predicted factory output would growth 6.2 percent in the first two months this year, picking up from December's 6.0 percent as demand for manufactured goods improves at home and abroad.

China's steel mills are churning out as much metal as possible, enjoying their best profits in years, even as they worry that a year-long rally in prices in the world's top steelmaking market is running out of steam, executives said.

Analysts had expected fixed-asset investment growth of 8.2 percent, quickening from 8.1 percent in the whole of 2016.

In welcome news for policymakers, growth in private investment quickened to 6.7 percent from 3.2 percent last year, the National Bureau of Statistics said on Tuesday, suggesting private firms are growing more optimistic about the business outlook after a sharp loss of momentum in the last few years.

Private investment accounts for about 60 percent of overall investment in China.

But many small- and medium-sized private firms still face tough access to financing, tight profit margins and a crowding out by big state companies.

Chinese policymakers have been trying to lure private investors into big infrastructure projects through public-private partnerships, but many lucrative sectors are still dominated by state firms.

Retail sales growth was well below expectations, however, coming in at 9.5 percent versus economists' expectations of 10.5 percent and 10.9 percent in December.

Auto sales dipped in the first two months of the year, according to government data. While that contrasted with industry estimates of 8.8 percent growth, auto makers in China expect full-year growth to slow as the government rolls back incentives on small-engine cars.

Other economic readings in recent weeks, including a surge in imports and rising producer prices, have added to signs of resilience in the economy.

China's first-quarter economic growth could accelerate to 7 percent year-on-year, from 6.8 percent in the last quarter, economists at OCBC wrote in a note last week, while adding the pace may ease beginning in spring.

China is targeting growth of around 9 percent in fixed asset investment for 2017, while retail sales were expected to increase about 10 percent, the state planner said during the nation's annual parliamentary session this month.

China has cut its economic growth target to about 6.5 percent this year to give policymakers more room to push through painful reforms to contain financial risks. The economy grew 6.7 percent in 2016, the slowest pace in 26 years.

The central bank has inched up short-term interest rates twice so far this year to encourage companies to deleverage and markets expect further modest increases in coming months. But the head of the central bank last week conceded it will take some time to bring debt levels down to more manageable levels.

Reporting by Beijing Monitoring Desk and Elias Glenn, Writing by Kevin Yao; Editing by Kim Coghill

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