Analysts say China’s first quarter economic data, released on April 15, highlights areas of concern but should not fuel market pessimism.
The slowdown of the world’s second-largest economy deepened in 2015 Q1, prompting calls for further policy easing. However, there were signs that the economy is gradually becoming better balanced.
China’s economy grew 7 percent year on year in Q1, down from 7.3 percent in 2014 Q4. This growth, the lowest quarterly growth rate since 2009, was in line with the 2015 “around 7 percent” target.
The National Bureau of Statistics (NBS) reported that growth in industrial output, fixed asset investment and retail sales in March all slowed and were below economists’ expectations.
All key headline numbers and components of GDP weakened in Q1, reflecting persistent downward pressure on the economy, UBS economist Wang Tao said.
The ongoing property downturn and staggering exports outweighed a modest Q1 cushioning from solid infrastructure investment and resilient consumption, Wang said.
The data is the latest in a string of numbers that suggest further weakness in the economy.
Export data for March, released on April 13, tumbled from a year earlier, due to sluggish global demand. Import shipments also shrank sharply.
Consumer inflation also remained tepid in March, while producer prices stayed in deflationary territory.
Premier Li Keqiang said on April 14 that the government should make efficient use of policy tools to maintain growth, promote employment and raise efficiency.
This week, the World Bank trimmed its forecast for China’s growth this year from 7.2 percent to 7.1 percent.
Despite the slowdown, the economy is still one of the world’s fastest growing and enjoys sound fundamentals as the healthy pace of job creation and income growth continue, analysts said.
NBS spokesperson Sheng Laiyun said Q1 economic growth was within a “reasonable range” and the slowdown was within expectation.
A “new normal” of slower growth is a desirable outcome as China seeks to wean the economy off its reliance on exports and state-directed investment, and instead encourage private sector growth and consumer spending to ensure sustainable expansion in the long run.
Progress has been made to shift to a more balanced and greener economy.
The service sector accounted for 51.6 percent of GDP in Q1, up from 48.2 percent in 2014 and 46.9 percent in 2013. Energy consumption per unit GDP continued to fall, recording a drop of 5.6 percent in Q1, after last year’s 4.8 percent decline.
Thanks to efforts to cut red tape, simplify administrative procedures and cultivate new growth engines, newly registered companies mushroomed and high-tech industries blossomed.
The number of newly registered companies surged 38.4 percent in Q1, while new energy automobiles and robotics saw industrial output gain more than 50 percent during the same period.
Policy makers have repeatedly stated that the country has the firepower to avert a hard landing, and should the slowdown cause widespread unemployment or a drop in citizens’ incomes, it would not hesitate to intervene.
Analysts expect the central bank, which has cut interest rates twice since November and once lowered the amount of cash the banks must hold as reserves, to roll out more policy easing measures.
Additional action is needed to contain pressure and to ensure the economy continues to run within a “reasonable range”, according to Wang Tao.
Potential measures may include the acceleration of infrastructure projects, cutting benchmark interest rates, increasing liquidity provision or speeding up pro-growth reforms, she said.
Bob Liu, an analyst at the China International Capital Corp., expects the central bank to cut the benchmark interest rate once, and the reserve requirement ratio (RRR) six times this year. Barclays economist Chang Jian forecast one interest rate cut in Q2 and two RRR cuts.
Wang expects supportive polices to buttress real activity in Q2/Q3, helping GDP growth back up to 7.1 percent in Q2. However, she added, any revival will be hard to sustain if the property downturn, the biggest drag on growth, continues to intensify to the end of the year.
To avoid a sharper slowdown, policy makers have unveiled supportive measures, including relaxed home purchasing rules and more investment in major infrastructure projects.
Longer-term development plans include further reform and three major strategies — the Belt and Road Initiative, coordinated development of the Beijing-Tianjin-Hebei region, and development of the Yangtze River economic belt. All of which are designed to unleash growth potential.
Sheng Laiyun expressed confidence that China will maintain stable and healthy growth, adding that the economy has the potential and condition to maintain a medium-high level of growth.
Ongoing industrialization, urbanization, agricultural modernization and digitalization will be the major source of growth momentum for the economy, Sheng said. When combined with macro-economic control measures, the official said, the economy is poised to maintain stable and heathy development.