By Jihoon Lee

SEOUL (Reuters) - South Korea's consumer inflation cooled for a sixth consecutive month in July and by more than expected, official data showed on Wednesday.

The consumer price index stood 2.3% higher in July than a year earlier, after a 2.7% rise in June and compared with a median 2.4% increase forecast in a Reuters survey of economists.

It marked the weakest annual increase since June 2021, according to Statistics Korea, and was the second straight month the consumer price data came in lower than market expectations.

On a monthly basis, the index rose 0.1%, picking up from no change the previous month, but it was also weaker than a 0.2% rise expected by economists.

Broken down by sector, prices of petroleum products were 0.7% lower than the month before, but agricultural prices jumped 4.7%, the biggest in six months, while public utility prices dropped 4.9%.

There were heavy rains in mid-July, disrupting agricultural supplies and causing upward price pressures on some items.

Core inflation, which excludes volatile food and energy prices, slowed to 3.3% on an annual basis from 3.5% the previous month and hit the slowest rise since April 2022.

Last month, South Korea's central bank extended its pause in its tightening cycle to a fourth straight meeting, after the last interest rate hike in January, but said it would maintain a tight stance amid still high prices.

By Stella Qiu

SYDNEY (Reuters) -Australia's central bank on Tuesday held interest rates at 4.1% for a second straight month, saying past increases were working to cool demand, but retained a warning that some more tightening might be needed to curb inflation.

Wrapping up its August policy meeting, the Reserve Bank of Australia (RBA) largely left its economic outlook unchanged from the previous quarter, forecasting headline inflation would return to within its 2-3% target range by late 2025, from the current 6%.

Markets had leaned toward a steady outcome given recent data showed inflation had eased for a second quarter and consumer spending was softening. However, economists were more split on the outcome, with 20 out of 36 polled by Reuters expecting a hike. [AU/INT]

The Australian dollar extended earlier declines to be 0.9% lower at $0.6656, and futures jumped as investors scaled back the probability of a further rise at all, with a move in September seen as a less than a 20% chance.

Swaps now implied a risk of around 13 basis points of tightening by year end.

Outgoing Governor Philip Lowe reiterated that higher interest rates were working to cool demand, and would continue to do so, and the pause this month would again provide time to assess the impact of the a 400 basis point jump in rates.

"The recent data are consistent with inflation returning to the 2–3% target range over the forecast horizon and with output and employment continuing to grow," said Lowe, adding that further tightening will be dependent on data and the evolving risk assessment.In a relief for policymakers, headline inflation slowed more than expected in the second quarter while retail sales posted their biggest fall this year in June.

With markets suspecting rate hikes might be already done, incoming Governor Michele Bullock, who assumes her role in September, will be in charge of steering a slowing economy and engineering any rate cuts, analysts say.

MIGHT BE DONE

Governor Lowe also removed any reference to a "narrow" path to a soft landing in which inflation eases without unemployment rising dramatically.

Indeed, the economy is already slowing to sub-par levels, with the RBA forecasting growth would ease to 1.75% next year and average a little above 2% in 2025, while the jobless rate would tick up to 4.5% late next year, mostly unchanged from previous estimates.

Commonwealth Bank of Australia (OTC:CMWAY), which had forecast a hike to 4.35% on Tuesday, now expects the RBA to be on hold for an extended period of the year.

"While the RBA retains a tightening bias, we expect the hurdle to another rate hike is high. It would take an upside surprise to the economic data from here... for the RBA to shift its assessment of the outlook," said Belinda Allen, a senior economist at CBA.

However, risk remains that services inflation, including surging rents, stays sticky. The labour market has so far defied expectations for a slowdown while house prices continued to climb in July, a positive wealth effect for consumers.

Both National Australia Bank (OTC:NABZY) and Goldman Sachs (NYSE:GS) now see a hike in November, bringing the cash rate to 4.35%, compared with expectations for two hikes before.

"I am a bit surprised about the RBA's over-relaxed tone with the backdrop that Australia's inflation rate today is now on the top tier of the developed economies," Hebe Chen, markets analyst at IG, told Reuters Global Markets Forum.

"If the labour markets turn out more resilient than expected, the chance for RBA to extend the tightening to 2025 is also a possibility that can't be ruled out."

By Kevin Buckland

TOKYO (Reuters) - Asian stocks hovered close to a sixteen-month peak on Tuesday and oil held near recent highs as investors found more cause for cheer over global economic prospects than reasons to worry, even as data showed risks remain.

The dollar hit a three-week high against the yen as investors continued to seek clarity on the Bank of Japan's recent adjustment to its yield curve control and what that might mean for monetary policy.

The Aussie dollar slumped after the Reserve Bank kept rates unchanged, even as it suggested more tightening may be needed in the future.

MSCI's broadest index of Asia-Pacific shares edged slightly higher, inching back toward the high reached Monday, which was its strongest level since April of last year.

Japan's Nikkei provided support, gaining 0.83% on the back of a weaker yen.

U.S. E-mini stock futures also pointed to a small rise after the S&P 500 ticked up 0.15% overnight.

"We're in a kind of economic nirvana, with an incredibly resilient economy, solid earnings reports and cooling inflation," said Tony Sycamore, a markets analyst at IG in Sydney.

"A little more than halfway through the year, it feels like we're in a very good spot."

Signs of a peaking out in European inflation on Monday echoed the narrative in the United States, providing more evidence that the biggest central banks are nearing the end of their tightening cycles.

However, China's stumbling post-pandemic recovery remained in focus after a surprise contraction in manufacturing in a private-sector survey released Tuesday.

Hong Kong's Hang Seng shed early advance to be about flat, with its property subindex flipping from gains to slide 1.47% as investors took profits after the previous day's rally, built on stimulus hopes.

An index of mainland Chinese blue chips drooped 0.36%.

"At this point, we remain sceptical that there will be any big-bang stimulus package forthcoming," said Alec Jin, investment director of Asian equities at abrdn.

"Investors are still waiting to see some meaningful comeback in high frequency indicators."

The positive U.S. narrative also faces some crucial tests this week, with several closely watched jobs reports due, culminating with monthly payrolls on Friday.

Corporate earnings later in the day include global bellwether Caterpillar (NYSE:CAT).

In currencies, the U.S. dollar index - which measures the currency against six major peers - rose as high as 102.07 for the first time since July 10.

That was aided by a continued retreat in the yen to a three-week low of 142.84 per dollar, as investors looked past the BOJ's surprise tweak of its 10-year yield ceiling to view changes to the negative short-term rate as a still distant prospect.

A closely watched auction of 10-year notes saw relatively weak demand, although the yield reacted little, sticking around 0.6%, well back from the new de facto cap at 1%.

The Aussie weakened as much as 0.9% to $0.66575 after the RBA opted to keep policy steady for a second meeting running. Markets had priced 70% odds for no action, and 30% probability of a hike.

"It's unsurprising that the knee-jerk reaction is negative, but I wouldn't expect it to be onwards and downwards for Aussie," said Ray Attrill, head of FX strategy at National Australia Bank (OTC:NABZY), who predicts a recovery toward $0.70 in coming weeks if risk sentiment stays positive.

"On a valuation basis, (Aussie) is looking pretty cheap."

Oil prices were little changed on Tuesday, trading near a three-month high reached on Monday, on signs of tightening global supply, as producers implement output cuts, and strong demand in the United States, the world's biggest fuel consumer.

Brent crude futures for October were down 0.2% or 18 cents at $85.25 a barrel. Front-month Brent settled at its highest since April 13 on Monday.

U.S. West Texas Intermediate crude was at $81.64 a barrel, down 0.2% or 16 cents from the previous session's settlement, which was its highest since April 14.

By Ann Saphir

(Reuters) -U.S. banks reported tighter credit standards and weaker loan demand from both businesses and consumers during the second quarter, Federal Reserve survey data released on Monday showed, evidence that the central bank's interest-rate hike campaign is slowing the nation's financial gears as intended.

The Fed's quarterly Senior Loan Officer Opinion Survey, or SLOOS, also showed that banks expect to further tighten standards over the rest of 2023.

"The most cited reasons for expecting to tighten lending standards were a less favorable or more uncertain economic outlook, an expected deterioration in collateral values, and an expected deterioration in credit quality of CRE (commercial real estate) and other loans," the Fed said.

The Fed has raised interest rates by 5.25 percentage points since March 2022, and its surveys and hard data have shown banks have been slowing their lending in response.

Monday's SLOOS report - which Fed policymakers had in hand last week when they decided to deliver an 11th interest-rate hike after skipping one at their June meeting - suggests credit tightening is ongoing.

"You've got lending conditions tight and getting a little tighter, you've got weak demand, and ... it gives a picture of a pretty tight credit conditions in the economy," Fed Chair Jerome Powell said last week when asked about the survey results.

But it does not point to a rush to tighten of the kind that some Fed policymakers had worried would occur after the banking turmoil in March and that might have made them skittish about further policy tightening ahead.

Still, it could threaten the Fed's "soft-landing" scenario.

"The degree of tightening in recent quarters looks pretty significant by broad historic standards," wrote JPMorgan (NYSE:JPM) economist Daniel Silver, noting that in the past such tightening has generally been associated with recessions. The data "are not a guarantee of a recession to come, but the tightening evident as of late suggests that the economy should slow."

TIGHTER TERMS

The survey showed a net 50.8% of banks tightened terms of credit last quarter for commercial and industrial (C&I) loans to medium and large businesses, up from 46% in the prior survey. For small firms, a net 49.2% of banks said credit terms were stiffer, versus 46.7% in the last survey.

Both measures fell short of the 70%-plus levels reached at the height of the pandemic in 2020; excluding that period, they were the largest increases since the Fed's first-quarter report in 2009, during the Great Financial Crisis.

Demand for C&I loans remained weak, though not to the degree reported in the previous survey covering the first three months of the year when banks said business demand for credit was the softest since 2009. In the latest survey, conducted in the last two weeks of June, the net share of banks reporting stronger demand from large and medium firms was -51.6%, compared with -55.6% in the prior period and from small firms was -47.5%, up from -53.3%.

On the consumer slate, credit terms continued tightening and demand slackening, though in some categories conditions were somewhat improved from the first quarter.

For instance, the net percentage of banks reporting greater willingness to make consumer installment loans was -21.8% versus the first quarter's -22.8%, which had been the lowest outside of the pandemic since 2008. Smaller net shares of banks reported tightening standards for auto loans, though terms for credit cards did tighten somewhat.

While still weak, demand for auto loans was the least soft in four quarters, while demand for credit card loans was essentially flat after two straight negative quarters.

By Ankur Banerjee

SINGAPORE (Reuters) - The yen slipped to a fresh three-week low on Tuesday as traders pondered the Bank of Japan's steps last week to tweak its yield curve control policy, while the Australian dollar was soft ahead of the Reserve Bank of Australia's policy decision.

The yen has been on a wild ride since Friday, when the BOJ took another step toward a slow shift away from decades of massive monetary stimulus, saying it would offer to buy 10-year Japanese government bonds at 1.0% in fixed-rate operations, instead of the previous rate of 0.5%.

The Asian currency touched a low of 142.80 per dollar. It was last at 142.66 per dollar, down 0.26%. Japan's benchmark 10-year government bond yield surged on Monday to a nine-year high, leading the central bank to conduct additional purchase operations to cap its rise.

"Markets could test just how 'flexible' the BOJ will be in the months ahead," said Carlos Casanova, senior Asia economist at UBP in Hong Kong, in a note, adding the subtle changes suggest that the BOJ may be gearing up to changing the YCC target in 2023.

"As the new line in the sand is 1%, it would make sense to broaden the YCC band by this level."

Investor attention during Asian hours will be on the policy decision from the Reserve Bank of Australia.

Markets generally expect policymakers to hold rates steady but a slim majority of economists favour a hike, arguing that inflation is likely to remain sticky for quite some time. The Australian dollar eased 0.06% to $0.672, having risen 0.8% in July.

Commonwealth Bank of Australia (OTC:CMWAY) strategist Kristina Clifton said the RBA decision is likely to be another close call, noting history shows that if the RBA hikes when they are not fully expected to then the Aussie can rise around 0.8%.

"However, we expect any post RBA strength in Aussie to be short lived given the weak global economic outlook." 

Meanwhile, Federal Reserve survey data released on Monday showed U.S. banks reported tighter credit standards and weaker loan demand from both businesses and consumers during the second quarter.

The Fed's quarterly Senior Loan Officer Opinion Survey, or SLOOS, also showed that banks expect to further tighten standards over the rest of 2023, adding to further evidence that rising interest rates are having an impact on the economy.

Tight lending standards can amplify the effects of rising interest rates and contribute to a U.S. recession later this year, CBA's Clifton said.

Against a basket of currencies, the dollar rose 0.059% at 101.93, flirting with a fresh three-week peak. The index fell 1% in July.

Meanwhile, Sterling was last at $1.2827, down 0.08% on the day, having gained 1.1% in July. Bank of England's policy meeting on Thursday is in the spotlight, with markets evenly divided between a 25- and 50-basis-point increase.

The euro was down 0.06% at $1.0986, while the kiwi eased 0.14% to $0.620.

BEIJING (Reuters) -China on Monday announced export controls on some drones and drone-related equipment, saying it wanted to safeguard "national security and interests" amid escalating tension with the United States over access to technology.

The restrictions on equipment, including some drone engines, lasers, communication equipment and anti-drone systems, will take effect on Sept. 1, the commerce ministry said.

The controls also affect some consumer drones, and no civilian drones can be exported for military purposes, a ministry spokesperson said in a statement.

"China's modest expansion of the scope of its drone control this time is an important measure to demonstrate our stance as a responsible major country, to implement global security initiatives, and maintain world peace," the unidentified spokesperson said.

Authorities had notified relevant countries and regions, the spokesperson said.

China has a large drone manufacturing industry and exports to several markets, including the United States.

The Department of Defense and Commerce Department did not immediately respond to requests for comment.

Congress in 2019 banned the Pentagon from buying or using drones and components manufactured in China.

U.S. lawmakers have said that more than 50% of drones sold in the U.S. are made by Chinese-based company DJI, and they are the most popular drone used by public safety agencies.

DJI said on Monday it always strictly complied with and enforced laws and regulations of the countries or regions in which it operates, including China's export control regulatory requirements.

"We have never designed and manufactured products and equipment for military use, nor have we ever marketed or sold our products for use in military conflicts or wars in any country," the drone maker added.

A German retailer in March 2022 accused DJI of leaking data on Ukrainian military positions to Russia, which the company rejected as "utterly false".

China's commerce ministry said in April this year that U.S. and Western media were spreading "unfounded accusations" that it was exporting drones to the battlefield in Ukraine, adding the reports were an attempt to "smear" Chinese firms and it would continue to strengthen export controls on drones.

The drone export curbs come after China announced export controls on some metals widely used in chipmaking last month, following moves by the United States to restrict China's access to key technologies, such as chipmaking equipment.

By Kevin Buckland

TOKYO (Reuters) - Japan's benchmark bond yield soared to a nine-year high and the yen rallied after the Bank of Japan's decision on Friday to conduct its yield curve control (YCC) policy more flexibly.

The BOJ maintained guidance allowing the 10-year yield to move 0.5% around the 0% target, but said those would now be "references" rather than "rigid limits".

To drive the point home, in a second fixed rate bond-buying operation on the day, the central bank offered to purchase the 10-year note at a yield of 1.0%, instead of the previous rate of 0.5%.

"By raising the upper limit for the fixed rate operations to 1%, the BOJ effectively widened the 10-year target band," said Naomi Muguruma, senior market economist at Mitsubishi UFJ (NYSE:MUFG) Morgan Stanley (NYSE:MS) Securities. "It made a stealth move in that sense."

Policymakers left the short-term interest rate target at -0.1.

The 10-year JGB yield spiked to 0.575% for the first time since September 2014 before easing slightly to 0.55%. Ten-year JGB futures dived to the lowest since mid-March at one point.

The yen, which swung violently immediately after the announcement as traders struggled to fully grasp its implications, eventually extended gains against the dollar to be up as much as 1.05% at 138.05. It had initially flipped to a 1.2% loss, sliding as far as 141.20. It last stood at 139.08.

The announcement came right before stocks reopened for the afternoon session, and the Nikkei share average began by aggressively paring the morning's losses before then reversing course and diving as much as 2.6%. The benchmark index ended the day down just 0.4% at 32,759.23.

The Nikkei was buoyed by financial shares, with the Tokyo Stock Exchange's banking index surging 4.6% to an eight-year high on the prospect of a steeper yield curve that would revive profit from lending.

The Nikkei's top seven stocks were all banks or life insurers, led by a 8.2% jump for Resona Holdings.

"The policy decision is indeed ambiguous," which explains the initial volatility across asset classes, said Richard Kaye, a portfolio manager at Comgest, which manages $4.3 billion under its Japanese funds.

However, Kaye said he is avoiding the "tired" bank trade.

"We focus rather on the stabilisation of the yen, which has been a hostage of the sovereign yield gap with the U.S., and therefore domestic economy beneficiaries in Japan," particularly small caps, he said.

The BOJ has been under pressure from investors all year to loosen yield controls, with wages and consumer prices rising. Data released on Friday showed core consumer inflation in Japan's capital remained well above the central bank's 2% target.

In its updated outlook report, the BOJ raised this year's core consumer inflation forecast to 2.5% from the 1.8% projected in April, but cut its fiscal 2024 forecast to 1.9% from 2.0% and maintained its 1.6% estimate for 2025.

At the same time, the central bank acknowledged that price expectations were showing signs of heightening again.

"Even though market reaction is choppy, this is a clear sign that the BOJ will take mini steps to tighten policy if inflation pressures remain," said Charu Chanana, a strategist at Saxo Markets in Singapore.

"Effectively, markets will test the 1% cap and that can be bullish for the yen."

\By Joyce Lee

SEOUL (Reuters) - From Intel (NASDAQ:INTC) to Samsung (KS:005930), global chipmakers are celebrating the beginning of the end of a semiconductor supply glut, but the outlook for demand from customers outside the artificial intelligence (AI) industry remains gloomy.

All the major markets for chips - smartphones, PCs and data centres - have shrunk this year, as both corporate customers and consumers scale back spending amid a weak global economy, high inflation and rising interest rates.

This has created an unprecedented oversupply of commodity chips, causing a record combined 15.2 trillion won ($12 billion) first-half operating loss for the world's two largest memory chipmakers, Samsung and SK Hynix.

This glut, however, has started to ease largely due to production cuts and as a decline in PC shipments eased to 11% in the June quarter compared to a 30% slump in each of the previous two quarters, data from tech analysts Canalys showed.

The smartphone market is also improving, with cellphone shipments falling 8% in the June quarter, versus 14% in the first quarter, according to research firm Counterpoint.

"Demand is recovering very gradually," Woohyun Kim, chief financial officer at SK Hynix, said on an earnings call this week.

"The recent improvement in PC shipments has been mainly led by promotions and low-end models, meaning it provided limited impact on chip demand recovery," he said, adding that shipment forecasts for PCs and smartphones this year have been downgraded from earlier predictions.

While demand for chips to support generative AI has rapidly increased since OpenAI's ChatGPT was launched late last year, the sector still accounts for a small fraction of overall chip demand and is crimping corporate spending on servers, as some companies prioritize investment in AI.

Intel CEO Pat Gelsinger said on Thursday an inventory glut in server central processing units (CPUs) will persist until the second half of the year and that data centre chip sales will decline modestly in the third quarter before recovering in the fourth quarter.

A sluggish recovery in China, the world's biggest chip buyer, is also dampening the overall outlook.

Both Samsung and SK Hynix said China's reopening failed to live up to expectations that it would revive the smartphone market, and that they were extending production cuts of NAND memory chips, widely used in smartphones to store digital data.

Analog chipmaker Texas Instruments (NASDAQ:TXN), which has heavy exposure to China, forecast third-quarter revenue and profit below Wall Street targets on Tuesday, bogged down by a sluggish recovery in end-market demand that has forced clients to cancel orders.

"China was roughly half of sales at the end of fiscal 2022, so China has the largest impact on TI's business," said Logan Purk, analyst at investment firm Edward Jones.

AI WINNERS

Manufacturers of the equipment used to make chips such as KLA Corp and Lam Research (NASDAQ:LRCX) are early winners of the AI boom. Both companies forecast quarterly revenue above Wall Street estimates this week, sending their shares higher.

"Advanced AI servers have significantly higher leading-edge logic, memory and storage content versus traditional servers, and every incremental 1% penetration of AI servers and data centres is expected to drive $1 billion to $1.5 billion of additional (chip equipment) investment," Lam CEO Tim Archer said on a conference call with analysts.

Chipmakers are also increasing production of the high-end chips used to support AI related chips.

SK Hynix said demand for AI server memory had more than doubled in the second quarter compared to the first quarter. Its DRAM chips, which hold information from applications while the system is in use, sold for a higher price in the second quarter versus the first, on average.

The company leads the market in high bandwidth memory (HBM) DRAM used in generative AI. It had a 50% market share in HBM as of 2022, followed by Samsung' 40% and Micron (NASDAQ:MU)'s 10%, according to TrendForce.

($1 = 1,278.7400 won)

By Tom Westbrook

SYDNEY (Reuters) - Asian stocks were off five-month highs and the yen extended a sharp rally on Friday with speculation that the Bank of Japan could take another small step toward dismantling its super-easy stimulus policies.

The BOJ sets policy later in the session. The Nikkei newspaper reported, without citing sources, that policymakers will discuss tweaking the yield control policy to allow 10-year government bond yields above a 0.5% cap in some circumstances.

The yield leapt to 0.505% in early trade.

The yen had earlier jumped about 0.5% on the report, gaining even as the dollar rose elsewhere after strong U.S. economic data and a toned down outlook from the European Central Bank.

The yen was holding about 0.5% higher at 138.83 per dollar in early trade, helped by Tokyo consumer prices rising slightly more than expected and as the risk of a policy surprise spooked short sellers.

"I wouldn't be running short into the BOJ," said Westpac strategist Imre Speizer.

"I think the idea is even a tiny tweak is a big deal for the BOJ. We'll probably get a reaction either way."

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.4%. Japan's Nikkei opened 1.4% lower though bank shares surged to an eight-year high on the prospect of rising interest income at lenders.

"If the BOJ adjusts its yield curve control program, financial markets will likely take it as the start of a policy tightening cycle regardless of the BOJ's rationale," said Commonwealth Bank of Australia (OTC:CMWAY) strategist Kristina Clifton.

"Under such scenario, we consider dollar/yen ... can lose about two to four yen on the day."

A tweak would also cap what may prove a landmark week for central banks, with markets pricing a better-than-even chance that the Federal Reserve and ECB have made their final hikes of the cycle.

On Thursday, the ECB raised rates by 25 basis points to a 23-year high, as expected, but President Christine Lagarde sent the euro tumbling with talk of a pause in September.

"Do we have more ground to cover? At this point in time I wouldn't say so," Lagarde told reporters. The euro slid nearly 1% overnight and nursed losses at $1.0980 on Friday.

On Wednesday, the Fed had also hiked by 25 bps and Chair Jerome Powell cheered investors when he said the central bank's staff no longer forecast a recession.

Further strong U.S. data, with better-than-expected second-quarter growth figures out overnight drove up longer-end Treasury yields and the U.S. dollar.

Ten-year yields rose 16 basis points and broke above 4%. They were steady at 4.006% in Asia trade.

S&P 500 futures tacked on 0.1% and Nasdaq 100 futures added 0.2%, helped by an after-market jump in shares of Intel (NASDAQ:INTC) which reported a surprise quarterly profit.

Brent crude oil futures slipped slightly from three-month highs to $83.63 a barrel.

By Ellen Zhang and Marius Zaharia

BEIJING/HONG KONG (Reuters) - Cola Yao earns 40% less than last year promoting credit cards for a Chinese state-owned bank, so she buys fewer clothes, less make-up and has cancelled her child's summer swimming classes.

"The cut is severely affecting my life in every aspect," said Yao.

The unexpected austerity comes on the back of China's slowing economy, complicating efforts for Communist Party leaders who pledged this week to boost workers' incomes to revive household consumption, a major policy goal.

Financial firms and their regulators have cut salaries and bonuses after China's top graft-busting watchdog vowed to eliminate "Western-style hedonism" in the $57 trillion sector.

And, some indebted local governments have cut civil servants' pay. Some hospitals and schools, as well as some private businesses facing a drop in sales, have done the same.

It is unclear how many Chinese have had their pay cut this year, but economists warn the high-profile examples are further weighing on already fragile consumer confidence, raising risks of a self-feeding deflationary spiral in the world's second-largest economy.

"Wage cuts will intensify deflationary risks and reduce willingness to spend," said Zhaopeng Xing, ANZ's senior China strategist.

While Chinese still earned 6.8% more on average in the first half of this year than in the same period of 2022, at 11,300 yuan ($1,580) per month, there is little optimism that pace can be maintained.

The Economist Intelligence Unit's Xu Tianchen said that increase was likely driven by rural migrant workers returning to factories after COVID-19 lockdowns, which compensates for subdued pay growth in white-collar jobs.

A survey by recruiter Zhaopin showed average wages offered for new jobs in 38 major cities dropped 0.7% in the second quarter from the same period of 2022, having grown only 0.9% in the first quarter.

In the first six months, total household disposable income, which includes wages and other sources of revenue, rose 5.8%, barely surpassing 5.5% growth in economic output.

To fix one of China's key structural weaknesses, which is that household consumption contributes much less to its economic output than in most other countries, disposable income needs to rise much faster than overall economic growth, analysts say.

For most of the past four decades it was the other way around.

WEAK BARGAINING POWER

Unilateral wage cuts are illegal in China, but complex salary structures offer ways around that.

Yao's monthly earnings dropped to 6,000 yuan because her employer in the eastern city of Hefei raised her performance goals, linked to usage of the credit cards she sells.

Shao, who sold make-up in the eastern city of Suzhou and only gave her surname for privacy reasons, had a choice to leave her company or accept a 50% wage cut. She chose the former, but her colleagues took the hit and also face delayed paycheques.

"Workers are pressed not only by the company, but also by the labour market. Their bargaining power ... is weakened so they tend to accept wage cuts," said Aidan Chau, researcher at Hong Kong-based rights group China Labour Bulletin.

State institutions typically keep base salaries untouched but reduce various allowances, public sector workers say.

A Shanghai doctor surnamed Xu said his public hospital cancelled quarterly bonuses and asked staff to do more overtime.

Xu, who works at a public hospital, saw his pay drop 20% over the last two years.

"The hospital said they have no money," he said.

While he's not struggling financially, the extra work affects his social life so he spends less going out.

Frugality is becoming endemic.

Retail sales in China have yet to return to their pre-pandemic trend and households prefer to save.

New household bank deposits in January-June rose 15% to 12 trillion yuan, equivalent to more than 50% of the total retail sales for the period.

Analysts call it a symptom of financial insecurity among consumers.

"If weak confidence becomes entrenched, it could be self-fulfilling and derail the recovery," said Xiangrong Yu, China chief economist at Citi.