• Tue
  • Sep 23, 2014
  • Updated: 2:19pm

Data points to broad slowdown in Chinese economy

PUBLISHED : Thursday, 13 March, 2014, 2:30pm
UPDATED : Friday, 14 March, 2014, 6:07pm

Fresh signs of weakness in the mainland economy have emerged, with a raft of indicators sinking to their lowest levels in years, but Premier Li Keqiang played down the need for stimulus, curbing hopes of a shift in policy.

Industrial production in the first two months of the year grew 8.6 per cent year on year, the slowest rate since the global financial crisis, after rising 9.7 per cent in December, data released by the National Bureau of Statistics showed yesterday.

Fixed asset investment rose 17.9 per cent in January and February, the least since 2002 and compared with full-year growth of 19.6 per cent last year.

Retail sales growth cooled to 11.8 per cent in the two months from 13.6 per cent in December.

Power production, an indicator of industrial demand, grew a weak 5.5 per cent.

We achieved the growth target last year … why can’t we make it again this year?

Following earlier data that showed an 18.1 per cent slump in exports last month, the latest figures add to the challenges faced by Beijing in stabilising jobs and launching economic and social reforms.

"January-February data suggests that manufacturing activities will have to accelerate [this month] to help the economy deliver 7.5 per cent growth in [the first quarter]," ANZ Bank economists led by Liu Ligang said in a research note. "We believe that a policy easing could be under way."

Watch: Chinese Premier Li Keqiang  says debt defaults 'hardly avoidable'

Liu said Beijing might increase fiscal spending and cut banks' reserve ratio requirements to sustain growth.

But Julian Evans-Pritchard, an Asia economist at London-based Capital Economics, said a policy shift was unlikely.

"Despite this broad evidence of a slowdown, we don't think policymakers will necessarily step in to support growth," Evans-Pritchard said.

Li also played down the prospect of immediate intervention to stem a further slowdown.

The "biggest challenge" the central government faced last year was growing downside risks in the economy, including a fall in fiscal revenue, a sudden tightening of liquidity in the interbank system, and a slump in power usage, he said at a press conference yesterday following the end of the annual session of the National People's Congress.

"We managed to achieve the economic growth target last year without resorting to short-term stimulus policy," he said. "Why can't we make it again this year?"

Li said challenges might be more complex this year as Beijing needed to combat not only a slowdown, but also problems including pollution and financial risks arising from the shadow banking system and accumulation of local government debt.

The government aimed to keep economic growth in "a proper range" to ensure enough jobs were created, he said, adding that this year's growth target of "about 7.5 per cent" was flexible.

The mainland's gross domestic product grew 7.7 per cent last year, continuing an easing trend following 2007's peak of 14.2 per cent, on the back of weaker domestic and external demand.


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This article is now closed to comments

First and foremost, the priority of reforms needs to be carefully sorted out.
To deleverage the economy at high interest rate is like having a surgery without using anaesthetic.
China's monetary policy should now be eased to some extent, to lower the cost of borrowing.
The shadow banking market and internet financing may subside as a resullt.
The yuan should be allowed to devalue further to reinvigorate China's exports.
The US should export more oil (helped by hydraulic fracturing) to help balance her current account (and to weaken the bargaining power of the Russians).
The resulting increase in imports of raw materials and energy products required by China's factories can help some EM countries to recover more quickly.
The minimum wage rate should not be allowed to go higher in the near future.
Instead both personal income tax and SMEs' profit tax should be reduced.
It's said that various fiscal policies can also be used to discourage some industries (say the property markets and wasteful SOE investments) and encourage others (say the SMEs).
China needs a lower borrowing cost to make those useful infrastructure investment to sustain China's future GDP growth rate.
One size (too-tight monetary policy) doesn't fit all.
Perhaps it's one-size-fits-none.
The affected and sleeping stock market also discourages the Chinese consumers to spend more, and inhibits the firms to raise fund through IPOs.
The high interest rate onshore also attracts hot offshore money into the country, in the form of carry trade and disguised as exports invoice.
The domestic property developers are also encouraged to obtain foreign loans at much lower borrowing rate, knowing that the yuan will keep on rising.
The capital inflow helps sustain the borrowing binge (Ponzi scheme) made by the property developers and the SOEs.
Also, the workers' wage rates and the yuan's nominal exchange rate keep on rising in recent years, both of them causing the yuan's real exchange rate to rise further, arguably too high already, and indirectly helping other EM countries to steal China's exports market-share.
The SMEs, the largest employers in China, are further hurt by the high profit tax rates.
I feel that right now in China, something have to go into reverse.
Form the experience of Japan, Hong Kong and other Asian countries, the drop in growth rates over the years is not a gradual smooth line --- it looks more like a step function.
The growth rate may drop suddenly by a large amount as time goes on.
The related employment level will be greatly affected as a result.
Inside a boutique, there are usually different sizes of clothes or shoes to choose from, to suit the needs of the customers with different body shape.
This is just common sense.
But in the European Union, the one-size-fits-all exchange rate among the member countries, the Euro I mean, causes most of the painful and lingering adjustment problems in the continent, especially in the peripheral countries.
It seems to me that some 'smart' monies and credit rating agencies are too optimistic about the coming recovery potential of the overall European economy, especially if there is no negative interest rate or European QE.
Similarly, in China, the present relatively tight one-size-fits-all monetary policy, causing relatively high interest rate in the market, can't stop the property market from going higher and higher.
It also can't discourage the SOEs to keep on borrowing at all costs, causing wasteful overcapacities, bad loans, and great demand for new loans to rollover the bad, thereby crowding out the SMEs (bad money driving out the good).
The proliferation of the shadow banking market also requires the SMEs to borrow at very high interest rate --- some of them can't even obtain the loans they sorely need at the high rates.
The so called economists should better come down to earth. In a global slowdown it is almost absurd to expect China to grow 9.5% for industrial output,retail sales to grow 13.5% and fixed-asset investment to rise 19.4%. Do they not correlate the recent PPI,PMI and export figures. If it is possible,then US,Europe and Japan will not be sluggish and Australia will have Christmas everyday.
Sony’s purchase of Columbia Pictures in 1989 must have been particularly galling to Americans who remembered that Sony built its fortune on the basis of US transistor technology bought for a mere $25,000.
(From “Japan: The Coming Collapse” published in 1992)
Transistor may be regarded as the greatest invention of the past century (it led to the subsequent computer revolution).
Nowadays this kind of bargain can't be obtained by China (and indeed by any other country) any more.
One way to increase China's productivity is to obtain foreign technology transfer.
This requires her to well protect the intellectual property rights in the country (indeed this should be done as a good member of the world community).
But so far this point has not been mentioned by China's leaders at all.
In economics, the circular flow of income has two parts: the real flow and the monetary flow.
Money is only a medium of exchange, what also matters is the production, transaction and consumption of the real goods and services, produced either locally or in the foreign countries.
China's reformers can't just concentrate on the monetary flow, like interest rate liberalization, debt market development, exchange rate liberalization, capital control relaxation, stock market development, reformation of the banking and shadow-banking system, and regulation of internet finance.
They also have to pay attention to the real flow of goods and services.
True competitiveness of a country also comes from the increased productivity of its factors of production.
Like Japan in the 1970s, the inevitable fall in the capital investment to GDP share will lead to slower growth in China.
Labour force growth is one determinant of an economy’s long-run growth rate, together with capital accumulation and productivity growth.


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