China growth slows to 6 year low as stimulus fails to find traction

Chinese economic expansion cooled to 7 per cent in the first quarter of this year, a figure that exceeded forecasts for a decline below the crucial 7 per cent threshold, but adding to fears that the world’s second biggest economy is facing difficulties.

The latest figure was better than the forecasts by multiple institutions that first-quarter growth would fall slightly below 7 per cent due to weak investment and demand.

Monthly retail sales, industrial output and fixed asset investment data released with the GDP figures all fell short of analyst expectations. Growth in fixed-asset investment (FAI), a key economic driver in China, was the slowest since 2000, while industrial output grew at its weakest since the global financial crisis in 2008.

And the property sector was also in trouble, with real estate investment rising an annual 8.5 per cent in the first quarter, the weakest rate since 2009.

"The slowdown of GDP in the first quarter is as expected. The Chinese economy is generally holding steady in the first quarter because employment, consumer prices and market expectations are basically stable, despite a slowdown in economic growth," said Sheng Laiyun of the National Bureau of Statistics.

Mr Sheng said the slowdown was expected as the Chinese government’s work report had forecast tough challenges and ongoing downward pressure for the economy this year.

DOWNWARD PRESSURE

The downward pressure was coming from the world economy recovering from crisis, with different economies at different stages of recovery.

“Also the exchange rates are different and the change frequently. Plus the price changes dramatically for the world bulk commodities. Geopolitical conflicts increase instead of decreasing. All these uncertainties add difficulties to the world economic recovery and also the instability,” said Mr Sheng.

Another pressure was coming from the domestic market, said Mr Sheng.

“Even though it is increasing fast, it still can’t make up for the influences from the dissipation of traditional forces. So the economy is positioned between the old and new impetus shifts and the downward pressure exists,” he said.

First quarter GDP totalled 14.07 trillion yuan (€2.13 trillion), growth of seven per cent, down from 7.3 per cent in the last quarter of 2014, in line with forecasts.

The average per capita disposable income of Chinese households rose 9.4 per cent year on year to 6,087 yuan (€923). The consumer price index, a main gauge of inflation, registered at 1.2 per cent in the first quarter.

Li Yong at the Hanqing Advanced Institute of Economics and Finance at Renmin University said the macroeconomic data was bad and the stock market was growing too fast.

“What long or short trading needs are excuses. Now the excuses and the tool already exists and many new stock investors who know nothing about stocks have entered the market. So the stock market is in danger now and it doesn’t look good for the stock market in the short term,” said Li.

Yi Peng, an urban development researcher in the National Development and Research Committee, said the GDP figure marked a new low, but was within expectations.

“Bad data is good for the stock market because the slowdown of the economy for sure needs all kinds of stimulus, including a relatively loose monetary policy and lowering the interest rate. At the moment, it is the worst of Chinese economy but it is also the best time,” said Mr Yi.

HSBC’s Qu Hongbin and Julia Wang said the first-quarter GDP figure was in line with expectations.

“However sequential growth slowed to an annualised rate of 5.2 per cent from 6 per cent in Q4, suggesting that growth momentum weakened further. Disinflation intensified as the GDP deflator fell to a six-year low,” they wrote in a research note.

“Meanwhile, March economic activity data surprised on the downside, with industrial production growth falling to a post crisis low of 5.6 per cent year on year,” they wrote.

“Fixed asset investment growth fell to a historic low on the back of further manufacturing and property weakness. Retail sales growth also moderated due to slower car sales,” HSBC said.

The data suggested that underlying growth momentum was already at policy makers’ bottom line, and warranted further policy easing.

UBS pointed out how despite successive quarterly declines, China’s real economy has yet to see significant labour market pressures.

“Though positive, this does not lessen the negative impact of the accompanying deterioration in businesses’ operational environment and rise in debt servicing burden – both of which should worry the government,” the bank’s research team wrote.

“In spite of the government’s intensification of policy support since late last year … any resultant uplift has been insufficient to arrest the downtrend in overall economic momentum,” UBS said.

On the plus side, the data shows that shadow credit growth has stagnated, as last year’s trend of “more banking and less shadow banking” it continued.