China industrial output falls to 17-year low

China’s industrial output growth missed estimates for May, rising at the weakest pace on record, fueling talk of additional stimulus as the outlook for a resolution of trade tensions with the US remains uncertain.

The measure saw 5% growth for the month, below the analyst expectations of 5.5% and below the April number of 5.4%, according to Reuters. Weak export numbers contributed to the slowdown.

Beijing has so far exercised caution in its use of fiscal and monetary policy to offset the impact of US tariffs on Chinese exports. Policymakers have been burdened with balancing the priorities of reducing excess leverage and maintaining a stable yuan with the challenge of boosting sentiment in the face of mounting trade pressure.

People’s Bank of China governor Yi Gang offered reassurances last week that Beijing had “tremendous” room in terms of monetary-policy options to provide stimulus, should the economic outlook continue to deteriorate. After the data release Friday, the PBOC announced more than US$40 billion in support for smaller banks.

Analysts say further stimulus measures are likely as Beijing prepares for a drawn-out trade battle with Washington after the breakdown of talks last month.

US President Donald Trump in recent weeks has vacillated between expressing ambivalence toward a possible deal with China and confidence that he will ultimately strike a deal.

But this week he boxed his Chinese counterpart in politically, issuing an ultimatum that President Xi Jinping must attend the Group of Twenty summit in Japan this month or face consequences.

There was widespread speculation that Trump and Xi might meet face to face at the gathering, presenting what many analysts saw as the best hope for the countries to dial back tensions. Trump himself repeatedly predicted that he would meet with Xi at the event. But after Trump warned Xi of reprisals should he not attend, the Chinese leader’s attendance could seem like a capitulation in and of itself.

In a clear sign that the Trump administration sees the pressure tactic as good policy, White House economic adviser Larry Kudlow stressed again on Thursday that there would be “consequences” if Xi did not travel to Tokyo for the G20 meet.

The most obvious response for the US administration would be to follow through on the threat of putting tariffs on an additional $300 billion worth of Chinese goods, a decision Trump said would not come until after the G20 summit.