Slowing growth adds to China stimulus pressure

Chinese growth slowed sharply in the first quarter of 2014, raising pressure on Beijing to provide a fresh round of government stimulus to prop up faltering growth in the world's second-largest economy.

In the three months to the end of March, China's gross domestic product expanded 7.4 per cent from the same period a year earlier, a slowdown from 7.7 per cent growth in the fourth quarter of 2013 but faster than the 7.2 per cent pace that some analysts had predicted.

The expansion in the first quarter, revealed by China's National Bureau of Statistics on Wednesday, was the slowest since the third quarter of 2012 when the government loosened monetary policy and accelerated infrastructure investment as growth dropped to 7.4 per cent. China's slowest quarterly growth in recent years was a trough of 6.2 per cent, in the immediate aftermath of the global financial crisis in 2009.

Comparing the first quarter with the fourth quarter, growth appeared to slow even more, with quarter-on-quarter expansion of 1.4 per cent, compared with a 1.8 per cent pace in the fourth quarter.

Since the start of the year, most economic indicators have pointed to a pronounced slowdown in China, the fastest growing major economy for more than a decade and a powerful stabilising force in the wake of the global financial crisis.

That contrasts with the picture in developed markets, where the US is expected to lead the strongest recovery in years and memories of the crisis are starting to fade.

In China, imports and exports have contracted in the first three months in spite of predictions at the start of the year that stronger US and European demand would prop up slowing Chinese growth.

Monthly retail sales in China and industrial production figures for March published on Wednesday showed some signs of stabilisation in the economy. But in the past three months, slumping trade, weak manufacturing, slowing real estate sales, lower investment and lacklustre consumption have convinced most economists to downgrade their growth predictions for 2014.

Imports and exports appeared to have contracted by 1 per cent in the first three months, although that reflects, in part, the confusion that surrounded faked invoices in the corresponding quarter of 2013 that the commerce ministry has declined to revise. NBS spokesman Sheng Laiyun said his bureau is relying on another indicator - the value of exports by large firms, which rose by 4.2 per cent in the first three months of 2014 - for a more reliable picture of the true health of exports.

"Judging from employment, income and consumer prices, the economy is still within a reasonable range despite the slowdown in GDP," Mr Sheng said. "The biggest bright spot is significant progress in structural adjustment . . . [The] services industry now makes up 49 per cent of Chinese GDP and is growing faster than the other sectors."

But growth in fixed asset investment, by far the most important driver of the Chinese economy, registered its weakest performance since 2002. Investment in the first quarter increased 17.6 per cent, well below the 20.9 per cent expansion in the first quarter of 2013.

Most analysts now expect the economy to grow 7.4 per cent for the whole year, which would be the weakest full-year reading since 1990, when China was under international sanctions in the wake of the Tiananmen Square massacre.

Beijing has set a target of "about" 7.5 per cent growth for the year but the country's leaders said that they would be comfortable with a lower rate provided that there are no major fluctuations and employment holds up. Mr Sheng said employment and wages were steady, thanks in part to a 2.4m decline in the working age population.

In apparent response to the slowdown in the first quarter, Premier Li Keqiang who would have seen the data at the start of April - revealed a "mini-stimulus" on April 2 designed to reassure investors that Beijing will not allow the economy to go off a cliff.

The package included tax breaks for small businesses and accelerated pre-existing plans to build more roads, railways, government-subsidised housing and airports.

Last week Mr Li also pledged not to respond to "short-term fluctuations in growth" with the kind of heavy-handed stimulus rolled out during the global financial crisis.

As most countries tumbled into recession following the collapse of Lehman Brothers in October 2008 China launched a massive state-led building boom that propped up domestic growth and global demand, particularly for commodities.

But there is increasing evidence that China's credit-fuelled, investment-heavy growth model has now reached its limits.

There are worrying signs of overbuilding and oversupply in the Chinese real estate market, with sales volumes and prices having already collapsed in many smaller cities.

Real estate construction accounted for as much as 16 per cent of GDP last year, a level approaching that in Ireland or Spain before their housing bubbles burst.

A widespread property market crash would be devastating for Chinese investment, which accounts for an unprecedented high level of about half of GDP.

© The Financial Times Limited 2014. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation