Slowdown in Chinese growth prompts fears economy is losing momentum

Analysts are concerned that recovery from the financial crisis is weak and being propped up by bank lending and government investment

A construction site in central Beijing. The economy continues to be supported by property and stimulus-supported infrastructure rather than by broad private sector investment or household spending, analysts say. Photograph: China Daily/Reuters

A construction site in central Beijing. The economy continues to be supported by property and stimulus-supported infrastructure rather than by broad private sector investment or household spending, analysts say. Photograph: China Daily/Reuters

 

Chinese GDP growth slowed to 7.7 per cent year-on-year and just 6.6 per cent quarter-on-quarter, data showed, prompting fears that economic recovery in the world’s second biggest economy was losing momentum.

The Chinese government has set a 7.5 per cent GDP growth target for the year.

Analysts are concerned that recovery from the financial crisis is weak and being propped up by bank lending and government-led investment, while growth in consumer spending remains subdued, and factory output and investment spending are slowing.

There are fears that a slowdown in Chinese growth and demand for goods could have a negative impact on global economic growth.

“On the whole I’m a structural bear on China, ” said View from the Peak analyst Paul Krake. “You can’t have it both ways. You can’t have banks operating on market principles while propping up dud debts from 2009; something has to give. The dud loans are going to come home to roost.”

At UBS, Wang Tao said the unexpected weakness mainly came from consumption-related light industry and, in March, also from the slowdown in property construction. “Going forward, we expect the initial impact of the government’s ‘frugality’ campaign to fade somewhat and consumer sales to recover modestly, the continued credit expansion to support fixed investment along with local governments’ ‘urbanisation’ drive, and destocking to wind down,” she and the UBS team wrote in a research note.

UBS is keeping its 8 per cent forecast for 2013, but has revised down its annual CPI forecast to 3 per cent and said the risk to its forecast had shifted “slightly more to the downside”.

Xianfang Ren and Alistair Thornton at IHS did not think the weakness would prompt the government to shift to all-out loosening stance again, because employment seemed steady.

“However, financial market distress has resurfaced in some weak spots, so credit is unlikely to be tightened dramatically, with a view towards avoiding defaults. In short, there is plenty more downside risk out there than upside risk. We have lost confidence in a robust recovery,” they said.

The big picture is that the economy continues to be supported by property and stimulus-supported infrastructure rather than by broad private sector investment or household spending, said Mark Williams at Capital Economics.

“In turn, this suggests that a loosening of property market controls or another round of stimulus would be needed to deliver significantly stronger growth over the quarters ahead,” he said.

However, given the fact that policymakers already seem concerned about the current pace of credit growth and excess investment in property, neither seems likely, he said.

“Widely held hopes of a continued acceleration in growth into 2014 will have taken a big knock today. Our 2013 GDP forecast remains 8 per cent, with risks to the downside. Our 2014 forecast is 7.5 per cent,” he said.