China is still hurting from the trade war and the pressure is mounting

The trade war might be headed for a slight reprieve, but China is still getting battered by a slowing economy and its standoff with the United States.

Industrial production in China — an important indicator for the country’s economy — grew just 4.8% in July compared to a year earlier, according to China’s National Bureau of Statistics. That’s the worst growth for that sector in 17 years.

The metric is important because it measures the output of key businesses in China’s manufacturing, mining and utilities sectors. The latest figure fell far short of the 5.8% that analysts polled by Reuters expected. It’s also a big slowdown compared to June’s 6.3% growth.

Global markets have rallied on hopes for trade optimism. On Tuesday, the United States announced that it would postpone new tariffs on several categories of Chinese-made consumer goods until December, instead of applying them in September as originally planned.

But there is still pressure building on China regardless.

The US flag flies over a container ship unloading it's cargo from Asia, at the Port of Long Beach, California on August 1, 2019. (Photo credit should read MARK RALSTON/AFP/Getty Images)

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Other important measures of China’s economy that came out Wednesday were also worse than expected. Retail sales grew 7.6% in July from a year prior, compared with an expected 8.6% increase.

Meanwhile, the labor market worsened in July. The jobless rate in urban areas increased to 5.3%, compared to 5.1% in June.

“The magnitude of [China’s] slowdown was rather surprisingly large,” said Ken Cheung Kin Tai, chief foreign exchange strategist for Asia at Mizuho Bank in Hong Kong.

This kind of slowing growth might give China “a greater incentive to make larger comprises” in any trade deal with the United States, he added in a research note. China’s central bank might also be pressured to cut interest rates, as other global central banks have done.

“The broad-based slowdown in activity and spending suggests that, after holding up reasonably well in the first half of the year, economic growth now faces renewed downward pressure,” said Julian Evans-Pritchard, senior China economist for Capital Economics, in a research note on Wednesday.

A woman walks by a money exchange shop decorated with different countries currency banknotes at Central, a business district in Hong Kong, Tuesday, Aug. 6, 2019. China's yuan fell further Tuesday against the U.S. dollar, fueling fears about increasing global damage from Beijing's trade war with President Donald Trump. (AP Photo/Kin Cheung)

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The slowdown in industrial production adds to broader evidence that factory activity in China has been subdued, Evans-Pritchard added. The country’s producer price index dropped in the government’s most recent report, for example.

“We expect a further slowdown in economic activity over the coming year” because of US tariffs and weak global demand, he said.