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Chinese economy slows to near 3-year low

Apr 13 2012 11:07 Reuters

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Beijing - China's economy grew at its slowest in nearly three years in the first three months of 2012, with a weaker than expected reading raising investor concerns that a five-quarter long slide has not bottomed and that more policy action would be needed to halt it.

The annual rate of gross domestic product (GDP) growth in the first quarter slowed to 8.1% from 8.9% in the previous three months, the National Bureau of Statistics said on Friday - below the 8.3% consensus forecast of economists polled by Reuters.

The GDP data headlined a flurry of indicators published on Friday showing March industrial output expanded 11.9%, March retail sales rose 15.2% and quarterly fixed asset investment, one of the principal drivers of China's economy, grew 20.9%.

They were broadly in line with the conservative expectations of investors who have grown concerned in recent weeks that the bottom of China's economic cycle would extend into the second quarter of the year as it struggles to escape its worst sequential slowdown since the 2008/09 global financial crisis.

"What's clear is that the economy is still decelerating and the property sector clearly is deflating," said Yao Wei, China economist at Societe Generale in Hong Kong.

"Looking at the property data, it seems that property investment has finally started to correct. I think this trend will continue and will drag growth even lower in coming months so we don't think this is the bottom yet. It means more monetary easing will be needed to prevent a sharper deceleration."

Residential real estate investment in March grew at its slowest annual rate since mid-2009, when policymakers in the world's second-biggest economy were rolling out 4 trillion yuan ($635bn) of stimulus to escape the grip of a financial crisis that had driven global trade to a virtual halt.

Real estate investment was worth about 13% of China's GDPin 2011 and the sector directly affects more than 40 industries, making Beijing's two-year campaign to curb rampant property speculation one that has been felt across the economic spectrum.

"The reading of 8.1% is lower than expected, and that's why Chinese Premier Wen has been urging policy fine-tuning," Xu Biao, an economist at Industrial Securities in Shanghai said.

"But Beijing is unlikely to roll out any big stimulus as a growth rate of 8% won't hurt employment badly."

Pain threshold

Growth of 8% is widely regarded as the threshold at which China struggles to create enough jobs for new entrants to its 800 million-strong workforce, raising the risk of social instability that Beijing abhors and so increasing the likelihood of stimulus measures being rolled out.

But as the government cut its official full-year growth forecast to 7.5% last month, there is a growing view that Beijing's opinion of the pace that might constitute a hard landing - which remains far from the market's consensus expectation - has moved significantly lower.

That means money managers who anticipate a policy response to a fall below 8% would be disappointed.

Economists polled by Reuters had forecast annual growth of 8.3% for the first quarter, with the 8.1% outcome the lowest since the 8.1% seen in Q2 2009.

China's economy expanded by 9.2% in 2011, a two-year low. Economists polled by Reuters expect growth in 2012 to ease further to 8.4%, which would be its slackest since 2002.

The risk of sluggish global demand for China's exports persisting into mid-year, with much of the eurozone seen in recession and weak jobs data last week reviving concerns about the strength of the US.. economic recovery, is a red flag to many in financial markets.

The euro and the Australian dollar eased after the data wrongfooted traders positioned for a strong showing in the wake of persistent overnight market talk of a positive surprise. Brent crude oil slipped back towards $121 a barrel and London Metal Exchange copper fell about 1%.

China's economic performance is widely read as a proxy for global commodity demand and the strength of international trade.

"The main downside was with exports and some in terms of consumption," said Kevin Lai, an economist at Daiwa in Hong Kong.

"In general, I think the first-quarter export results have disappointed the consensus. We still believe there should be more policy relaxation to add to growth domestically and offset weakness in exports."

China's statistics agency said on Friday the country still faced difficulties stabilising export growth.

Rebound hoped for

But March money supply data released on Thursday suggested that a recovery might be gaining traction, with new loans made in the month topping 1 trillion yuan ($158.55bn) for the first time since January 2011, coming in about 25% ahead of expectations after two straight months of underperformance.

That data, coupled with a bounce in the index of China leading indicators calculated by the Organisation for Economic Cooperation and Development (OECD), leaves some economists more confident that growth was likely to rebound in coming months.

The OECD leading indicator has successfully forecast previous turning points in China's business cycle; meanwhile quarter-on-quarter seasonally adjusted growth of 1.8% in Q1 came in ahead of the 1.6% consensus.

"We are comfortable with our 8.6% annual GDP growth forecast, and we expect year-on-year GDP growth to rebound to 8.5-8.6% in coming quarters.

"We don't think Beijing has an appetite for higher growth because that will raise prices of raw material imports and reignite inflation," said Ting Lu, China economist at Bank of America/Merrill Lynch in Hong Kong.

"With the strong new loans data and the rebound of production in March, most investors will accept March is the turning point, and we are now on the upturn of the cycle," he wrote in a note to clients.
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