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Chinese economy caps its weakest quarter since 2009

Beijing - China’s economy slowed in December, capping the weakest quarter of growth since the 2009 global recession, as the Communist leadership grapples with a transition to consumer-led expansion.

Industrial production, retail sales and fixed-asset investment all slowed at the end of the year, while gross domestic product rose 6.8% in the fourth quarter from a year earlier. Full-year growth of 6.9%, the least since 1990, was in line with the government’s target of about 7%.

Policy makers must weigh the need for further monetary easing with the risk it would spur more weakness in the yuan and additional capital outflows. Arguing against major stimulus: a rise in services, which became the biggest component of the economy for the first time, cushioned the slowdown and underpinned employment.

"2016 will be another challenging year as the old capital intensive, highly levered industrial sector continues to be placed under severe strain," said Kenneth Courtis, former Asia vice chairman at Goldman Sachs Group and now chairperson of Starfort Holdings. "But we remain constructive on the outlook for the period ahead," he said, citing steady job gains and retail sales that are rising faster than GDP.

Industrial production posted one of the weakest gains in the past quarter century, increasing 5.9% in December from a year earlier. That compared with a 6% median estimate of analysts and November’s 6.2%.

Retail sales increased 11.1% from a year earlier, compared with the 11.3% projected by economists. Fixed-asset investment excluding rural areas expanded 10% last year, the slowest pace since 2000.

The Australian dollar, which typically fluctuates in reaction to signs from China, Australia’s biggest export destination, fell in the 30 minutes after the GDP release, then recaptured lost ground in the afternoon. The Shanghai Composite Index closed 3.2% higher after Tuesday’s data fueled speculation of increased stimulus and industrial shares rallied on prospects of state-fund buying.

Bloomberg’s monthly GDP tracker slipped to 6.69% in December, from 6.85% a month earlier. A measure of economy-wide inflation slipped deeper into negative territory, declining 0.5% in 2015, according to another Bloomberg gauge.

"Deepening of deflationary pressures require more decisive reflationary policies," economists Julia Wang and LiJing at HSBC Holdings wrote in a report. "Both monetary and fiscal easing measures are needed to help support demand and anchor expectations."

HSBC forecast a quarter percentage point interest-rate cut and 100 basis point reserve ratio reduction this quarter, plus a wider fiscal deficit target for the year.

China’s top leadership has signaled in recent months it may allow some additional slowness as they tackle delicate tasks such as reducing excess capacity, but nothing that could threaten President Xi Jinping’s goal of at least 6.5% growth through 2020. The world’s second-largest economy will slow to 6.5% this year and 6.3% next year, according to the median of economist estimates.

China’s economy is going through a “tough transition to make, but critical if growth is to be sustainable,” former Federal Reserve Chairman Ben S. Bernanke said at a forum Tuesday in Hong Kong. “You have to have a transition to more services if you want to keep the economy growing and providing jobs.”

Two-speed growth

China’s economy is growing at two speeds, with old rust- belt industries from steel to coal and cement in decline while consumption, services and technology do better. Services accounted for 50.5% of output last year.

The policy response to last year’s slowdown included accelerated monetary easing with six interest-rate cuts since late 2014 and increased fiscal spending. Through the turbulence, the central bank forged ahead with interest-rate liberalization by removing a cap on deposit rates and won the International Monetary Fund’s approval for the yuan to enter its Special Drawing Rights basket of reserve currencies.

This year, attention is likely to turn more to a new focus on supply-side reforms such as slashing excess industrial capacity and labor in state enterprises, cutting taxes and boosting productivity.

"China’s monetary policy should remain extremely accommodative," said Zhou Hao, an economist at Commerzbank AG in Singapore. "While headline growth looks fine, the breakdown of the figures points to overall weakness in the economy. More importantly, recent market turmoil warns many of the weakness of China’s economy and its financial system."

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