Sagging Chinese Data Douse Recovery Hopes

Discussion in 'China' started by nrj, May 12, 2012.

  1. nrj

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    BEIJING—China's economy slowed sharply in April—from industrial output to bank lending to foreign trade—throwing cold water on expectations for a rapid recovery in the world's main growth engine, and putting pressure on Beijing to shift policy decisively into stimulus mode.

    The poor results likely came as a surprise to China's top policy makers. At the end of April, Chinese Premier Wen Jiabao predicted—incorrectly—that trade figures would show both healthy domestic demand as well as recovering appetite for Chinese exports. The slowing economy adds another layer of uncertainty as China deals with the political fallout from the ousting of former political highflier Bo Xilai, and prepares for its once-in-a-decade change in leadership.

    "Political transition delays policy response; that's probably why we haven't seen much loosening" of fiscal and monetary policy thus far, said Zhang Zhiwei, a China analyst at Nomura research. "The economy has now slowed down so much that there will be a consensus to promote growth."

    China's economy grew at 8.1% in the first quarter, compared to the year-earlier period, its slowest pace of growth since the spring of 2009, and analysts had widely expected a rebound in the current quarter. But that now looks unlikely and several analysts downgraded their forecasts. "We were wrong," said Lu Ting, Bank of America's China economist, who cut his second quarter forecast on Friday to 7.6%, year-over-year, from 8.5%

    Slowing inflation, with the consumer-price index dipping to 3.4% year-to-year in April from 3.6% in March, was one of the bright spots in the data. With inflation moderating, Chinese leaders can worry less that stimulus spending will lead to a new burst of price rises, which they spent much of last year battling.

    But for the global economy, the prospect that a rebound in the world's second-largest economy will take longer than thought is bad news. With Europe in recession, the U.S. and Japan struggling to maintain 2% growth and India's economy weakening, the hopes for China to jumpstart demand had been amplified. A weaker China means fewer imports of raw materials from Latin America, Australia, Indonesia and Africa, agricultural goods from the U.S., and capital goods from Europe, among other products. China's imports from the U.S. have grown just 2.5% so far this year

    The data, which missed expectations by a considerable margin, took the markets by surprise. The Hang Seng Index closed down 1.3% and the Shanghai Composite Index down 0.6%.

    Growth in industrial production dipped to 9.3% in April from 11.9% in March, the lowest level since May 2009. That fall in output reflected broad based weakness across investment, consumption, and exports—the three main drivers of China's growth.

    Growth in electricity output, often seen as a proxy for the health of China's industrial sector, fell to 0.7% year-to-year, down from 7.2% in March.

    The government's two-year effort to deflate the housing bubble also put the brakes on economic activity. Housing sales, by area, fell 14.9% in the first four months of the year. Weak demand dented incentives for developers to invest in new projects. The area of new residential property under construction shrank 7.9% in the year to April from the same period in 2011.

    Foreign demand was also weak, with China reporting on Thursday that growth in exports dipped to 4.9% year-to-year in April from 8.9% in March. Exports to the troubled European economy, which fell 2.4% year-to-year, were a weak a particular weak spot.

    "Companies in Europe are running out of cash," said Willy Lin, managing director at Milo's Knitwear International Ltd., a Hong Kong company that manufactures and exports from China. "All the brands owe money to Hong Kong or Chinese businesses." Adding to the problem, he says: Too many Chinese exporters focus on labor-intensive products and are losing business to lower-cost nations like Vietnam and Cambodia.

    There were signs of worse to come on the trade front. Imports of components for products to be sold to foreign customers fell 4.1% year-to-year. Analysts said that was a sign of destocking by firms worried about weak external demand.

    With the data markedly weaker than expected, Chinese policy makers are likely to accelerate efforts to ease policy.

    In contrast to the U.S. and many European governments, China's public finances are strong, creating space for a fiscal stimulus. The Ministry of Finance has remained conservative so far this year, with a fiscal surplus of 874 billion yuan ($138 billion) in the first four months. Ratcheting up public spending on infrastructure and public housing in the months ahead is one option to support growth, though it would take time for the projects to get under way and affect the economy much.

    When China boosted infrastructure spending in 2009 and 2010, in response to the global financial crisis, it did so largely through increased lending, which supported growth but also increased real-estate prices and raised fears of a spate of bad loans. The government is wary of undertaking a similar crash-lending program

    China's central bank has been working behind the scenes to make it easier for banks to lend, but so far that appears to be having little impact. New loans fell to 681 billion yuan in April, down from 1,010 billion yuan in March and their lowest level so far this year.

    He Weisheng, a China strategist at Citibank, said that reflected weak demand for loans rather than insufficient capital at banks. "The banks have the money to lend, the problem is that firms don't see profitable opportunities to invest, so they don't want to borrow" he said.

    That raises the question of whether central bank's preferred method of boosting the economy—reducing the reserves that banks have to hold—would have much effect. "The chances of a cut in the reserve-requirement ratio are now above 50%, but with liquidity ample that would be mainly a symbolic show of support for growth by the central bank" said Mr. He.

    Easing controls on the property sector is also a possibility—and there are signs that sales have been allowed to edge up in some cities after the Lunar New Year holiday—but that would risk reinflating the property bubble and would require Chinese leaders to reverse policies they have stressed for months—a change that would compund uncertainty in an already tumultuous year for China.

    China Data Douse Recovery Hopes - WSJ.com
     
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