The Chinese economy is deteriorating. This makes a trade agreement more likely

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The country on Monday released data showing that industrial production – an important indicator for the Chinese economy – had only grown 4.4% in August compared with the previous year. That's worse than the sector's performance in July, with growth of 4.8%, its weakest growth in 17 years.

Industrial production is important as it measures the output of China's leading manufacturing, mining and utilities industries. The latest figure was also worse than the 5.2% growth expected by analysts polled by Reuters.

Other data released Monday by China's National Bureau of Statistics was also weak. Retail sales growth slowed to 7.5% in August, down from the 7.6% gain in July from July.

The world's second largest economy has struggled because of its trade war with the United States. It also faces national challenges as it tries to rely less on debt to fuel growth.

China exempts tariffs on US soybeans and pork
The new data comes as tense trade relations between China and the United States seem to be improving, at least a little bit. China announced last week its intention to exempt tariffs on US soybeans and pork. This was the latest in a series of steps taken by both countries to calm down in anticipation of a new round of trade negotiations.

The low August numbers reflect a "growing downside risk for the economy" as the trade war rages on, said Ken Cheung Kin Tai, chief foreign exchange strategist for Asia at Mizuho Bank in Hong Kong. "In this context, it is logical that China relax its position on trade negotiations" and has put in place stimulus packages in recent weeks.

Weak data is also fueling speculation about how China's central bank will continue to react to the slowdown, Cheung added.

The People's Bank of China has taken several steps in recent weeks to boost the country's economy. Earlier this month, it reduced the amount of cash that banks must keep in reserve by reducing the reserve requirement ratio for the first time in eight months.

China takes more action to boost economy slowing
And in August, the central bank launched a new prime lending rate that will become the benchmark for banks in loan pricing, a reform designed to support growth and jobs. It is fixed monthly. Cheung said Chinese policymakers could set this rate lower when it will be fixed later this week.
China has also allowed the yuan to depreciate to its lowest level in more than a decade in recent weeks. But a weaker currency is unlikely to fully offset tariffs and sluggish global demand, said Martin Lynge Rasmussen, Chinese economist for Capital Economics. In a research note released on Monday, he said China will continue to ease monetary policy in the coming months.

Tommy Wu, chief economist at Oxford Economics, also said the country needed to take important steps to stabilize growth. His company forecasts economic growth of 6.1% this year and 5.7% in 2020.

The People's Bank of China could consider a reduction in its rate of medium-term loan facility, which is a key lending rate, said Ting Lu, chief economist for the Japanese company Nomura Investment. He also expects the government to ease restrictions on the real estate sector later this year to boost purchases.

Chinese officials said they have enough tools to support the economy.

"The Chinese economy is under some downward pressure from slowing global growth, protectionism and the rise of unilateralism," Chinese Premier Li Keqiang said in an interview with Russian media , according to a transcript released Monday by the Chinese government. "But the economy also has great resilience, potential and enough room to maneuver."

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