China data highlights weak economy, remedies in focus

Reuters/Beijing

China’s growth could slow further after data released yesterday showed subdued activity right across the economy in May in the face of sustained global weakness, raising the possibility of interest rate cuts.

Evidence has mounted in recent weeks that China’s economy is fast losing growth momentum, with sluggish domestic demand failing to make up for lethargic export sales as the country’s main trading partners wrestle with their own slowdowns.

A raft of figures over the weekend added to that evidence, with exports in May posting the lowest growth in almost a year, inflation, growth in bank lending and investment below expectations and factory output and retail sales growing only about the same pace as in previous months.

“(The) activity numbers indicate continued expansion but growth remains unconvincing and the momentum seems to have lost pace in May,” Louis Kuijs, an economist at RBS, said in a note.

“The short term growth outlook remains subject to risks and we may well end up revising down our growth forecast for 2013 further.”

China’s consumer inflation slowed to 2.1%, the lowest in three months, while producer prices fell 2.9%, the lowest since September. A Reuters poll had put inflation at 2.5% and factory-gate prices down 2.5%.

“The inflation data showed China’s economic growth continued to slow down. Q2 growth is probably even slower than Q1. In particular, the PPI data showed very weak demand,” said Jianguang Shen, chief China economist at Mizuho Securities Asia in Hong Kong.

Separate central bank data showed that Chinese banks lent 667.4bn yuan ($109bn) in new loans in May, missing market expectations of 850bn yuan and lower than April’s 792.9bn yuan.

M2 money supply rose 15.8% from a year earlier, slightly below a median forecast of 15.9%, while total social financing, a broad measure of liquidity, was 1.19tn yuan versus 1.75tn yuan in April.

Meanwhile, growth in retail sales, fixed-asset investment and industrial output met expectations at 12.9%, 20.4% and 9.2% respectively, but the figures were little changed from the previous month.

On Saturday, official data showed that China’s exports posted their lowest growth rate in almost a year in May while imports unexpectedly fell.

China’s economy grew at its slowest pace for 13 years in 2012, and it has so far surprised on the downside, bringing warnings from some economists that the country could miss its growth target of 7.5% for this year.

The weak data will enable China to keep an easy monetary stance and some see the possibility that the People’s Bank of China could cut rates later this year to reduce financing costs for struggling Chinese firms, provided that housing inflation does not flare up.

“We had expected an L-shaped economic recovery in China and that the growth would stabilise at around 7.9%,” said Jian Chang, China economist for Barclays in Hong Kong.

“Now industrial and other data showed slower growth rate in Q2 than in Q1 and ... we now think China’s growth will stabilise at around 7.6% (this year). The possibility for the central bank to cut interest rates is now rising,” Chang said.

However, government economists from top think-tanks in Beijing told Reuters this week that the new leadership of President Xi Jinping and Premier Li Keqiang will tolerate quarterly growth to slip as far as 7% before looking to lift the economy.

Li had struck a more upbeat note on Saturday and was quoted by state television as saying that China’s economy was generally stable, growth was within a “relatively high and reasonable range” and the employment situation was stable.

Moreover, the central bank is in a dilemma when it comes to interest rates, since property prices continue to rise, and cutting rates could refuel a bubble the central bank has been working to contain in recent months.

“Property prices will jump if it cuts rates as recent government cooling measures have not achieved desired results,” said Tang Jianwei, senior economist at Bank of Communications in Shanghai.

“And cutting rates may not be effective in slowing speculative money inflows, which are mainly driven by expectations of yuan appreciation.”

Most economists agree however that the government will not be looking to a fresh stimulus package along the lines of its 4tn yuan one unleashed during the global crisis in 2008.

That package sparked a lending boom that fuelled a property bubble and left local governments under a pile of debt.

The new leadership is keen to push reform of the economic structure rather than just throw money at the existing one.

Sources had told Reuters in May that a consensus had been reached among top leaders that reforms would be the only way to put the world’s second-largest economy on a more sustainable footing.