Risks to China recovery seen as factory output underwhelms

A woman sells goods on a street in Shanghai yesterday. Industrial output in China rose 9.3% in April, the National Bureau of Statistics (NBS) said, accelerating from March but below market expectations, underscoring sluggish growth momentum.

Reuters/Beijing

China’s factory output growth was surprisingly feeble in April and fixed-asset investment slowed, rekindling concerns that a nascent recovery is stalling and adding to pressure on policymakers to take action to stimulate the economy.

However, China’s already-easy monetary policy and rising home prices complicate the options available to Beijing’s new leadership, leading some analysts to say that any response could be limited to fiscal measures.

Annual industrial output grew 9.3% last month, according to data released by the National Bureau of Statistics yesterday, up from a seven-month low hit in March but still missing market expectations for a 9.5% expansion.

“Economic activity remains weak,” said Liang Youcai, a senior economist at the State Information Centre, a government think-tank.

“We now expect second-quarter gross domestic product growth of around 7.8-7.9% if there are no stimulus measures.”

Yesterday’s data dealt a further blow to investors’ hopes for a decisive revival of the world’s second-largest economy, following last month’s announcement that growth unexpectedly cooled in the first quarter of the year to 7.7%.

Growth in fixed-asset investment, an important driver of China’s economy, also disappointed in April. Investment rose 20.6% in the first four months from the same period a year ago, compared with expectations for a 21% rise.

Only retail sales met market expectations, growing 12.8% in April from a year ago.

For investors, the big question now is whether China’s economic rebound remains intact. This month’s evidence underlines Beijing’s growing policy dilemma, with economists saying that a recovery — if at all — is still fragile.

Data last week showed China’s consumer inflation, although muted, quickened more than expected in April, narrowing the scope for Beijing to further ease monetary policy if growth swoons.

Worse, surprisingly strong trade figures last week that were incongruous with subdued foreign demand suggested a substantial flow of hot money betting on a rising yuan is sneaking past China’s capital controls.

 A flow of speculative cash into China is a headache for Beijing as it may fuel a rally in the country’s frothy property market, where prices are already at all-time highs.

“Monetary policy is now facing a dilemma,” said Jiang Chao, an analyst at Haitong Securities in Shanghai. “On the one hand, the central bank cannot cut interest rates for fears of reigniting property inflation. But on the other hand, China is seeing mounting hot money inflow pressures.”

April’s factory output data showed makers of transport equipment experienced one of the sharpest slowdowns last month compared with March. Crude oil output was another major decline.

China’s state-led infrastructure construction boom has been a major contributor of growth since the 2008/09 financial crisis as local governments pump-primed their economies.

Yet the sector has slowed in the past two years after profligate state spending accumulated a pile of government debt worth as much as 20tn yuan ($3.25tn), leading Beijing to order banks to reduce funding for the industry.

However, some analysts say Beijing could relax controls over financing of state infrastructure projects should economic growth slacken further.

A researcher at a state think-tank told Reuters last week that some local governments are already lining up financing options for their planned infrastructure projects in case they get a green-light from Beijing. He declined to be named due to the sensitivity of the matter.

Beijing has so far offered few clues about its policy plans, saying little beyond its stock phrase of keeping economic growth “stable”.

Within the government, state researchers say policymakers are debating over whether to focus on short-term demands or long-term benefits. There are arguments for Beijing to take action and stimulate growth now, or hold off and focus instead on restructuring the economy for the long haul.

China wants to promote consumption and cut its reliance on investment and exports, a transition that could be painful in the short-term as it constrains the government’s ability to unveil any new large-scale fiscal stimulus.

Ting Lu, an economist at Bank of America-Merrill Lynch, said he did not believe Beijing would succumb to the temptation to try to lift economic growth in the near term.