China economy slows, still in Beijing’s comfort zone


Reuters | Thu Jul 15, 2010 | 12:09pm IST

A migrant worker at a construction site in Guangzhou China’s economy cooled in the second quarter, a slowdown that is likely to extend over the rest of the year as Beijing steers monetary and fiscal policy back to normal after a record credit surge to counter the global crisis. Annual gross domestic product growth moderated to 10.3 percent from 11.9 percent in the first quarter, the National Bureau of Statistics (NBS) said on Thursday. The reading was slightly below market forecasts of 10.5 percent growth. Other data suggested that curbs on lending to home buyers and local authorities, along with an ebbing of government stimulus spending and an end to inventory rebuilding, were biting with greater force as the quarter drew to a close. Particularly striking was a sharper-than-expected drop in factory growth to 13.7 percent in the year to June, below forecasts for 15.3 percent and May’s 16.5 percent reading. But the government showed no sign of being perturbed, partly because the slowdown reflected a high base of comparison in 2009. Sheng Laiyun, an NBS spokesman, said the GDP growth rate remained high, in line with the average of the past decade and well within Beijing’s comfort zone. "The slowing will help our economy avoid overheating and assist in the transformation of our economic model," he said. Economists polled by Reuters ahead of the data saw full-year growth of 10 percent this year, slowing to 9.0 percent in 2011.

POLICY TO MARK TIME

Most economists expect no dramatic policy response to Thursday’s figures, which included a drop in consumer inflation to 2.9 percent in the year to June from 3.1 percent in May. Markets had forecast a 3.3 percent rise. With growth slowing and inflation cresting, HSBC and Barclays Capital said they no longer expected interest rates to rise this year. Ting Lu said the chances of an increase in required reserves were fading, too. Beijing was likely to keep up its campaign against property speculation while ramping up spending on public housing to stabilise growth. "Despite the slowing growth, we think the chance for double-dip in China is quite small as China’s pragmatic policymakers are quite flexible on policy stance. And they still have a deep pocket to buffer any big slowdown," Lu said. One risk emphasised by Sheng, the NBS spokesman, stems from the euro zone’s debt woes and its belt-tightening plans. Chinese exporters have not suffered so far because they are filling a backlog of orders, but pressure on them in coming months could be quite significant, he said. Market reaction was muted, perhaps because most of the figures were leaked earlier in the week. Asia-Pacific shares outside Japan were down 0.4 percent, back to their opening levels after a brief spike, while the Shanghai stock market shed 0.3 percent. Offshore yuan forwards were little changed.   

GOOD NEWS, BAD NEWS

Consumption was resilient, although annual retail sales growth eased to 18.3 percent in June from 18.7 percent in May. But year-to-date investment in urban areas in fixed assets such as flats and factories slowed a notch, growing 25.5 percent from a year earlier after a 25.9 percent rise in May. And Dong Tao, chief non-Japan Asia economist for Credit Suisse in Hong Kong, calculated that factory output, seasonally adjusted, actually fell month-on-month in June for the first time since November 2008. "The good news is the economy is holding up. The bad news is investment is coming down, hence demand for commodities will fall," Tao said. The moderation in growth, though engineered by the government, makes it increasingly likely that the pace of monetary tightening will slow. The official China Securities Journal said on Thursday that the government should refrain from further policy tightening as the economy may slow more sharply than expected over the rest of 2010.

"In the second half of the year, external demand will gradually weaken and the dividend from the trade surplus will fall. This requires an increase in overall social investment and a halt to tightening of both fiscal policy and monetary policy," an editorial said. Unlike many of its Asian peers, most recently Thailand on Wednesday, China has not raised interest rates this year. But year-on-year expansion in the stock of outstanding yuan loans slowed to 18.2 percent at the end of June from 33.8 percent as recently as November. Growth in the M2 measure of money supply moderated to 18.5 percent from 29.7 percent over the same period.

THE BEST IS IN THE PAST

Markets worry that the government is applying the brakes too hard to an economy that has been a major engine of the global recovery from the deepest recession in 80 years. China last year became the top trade partner of Brazil, India and South Africa. German exports to China are booming. Thursday’s figures reinforced the view that the first quarter marked the cyclical peak for China, which is set to overtake Japan this year as the world’s second-largest economy after the United States. Goldman Sachs calculated that, at an annual rate adjusted for seasonal variations, GDP growth fell to 8 percent in the second quarter from 10 percent in the first. Morgan Stanley estimated a more modest decline, to 8.4 percent from 9.2 percent. "We expect growth will ease further in the second half of the year, with external factors likely to determine the severity of the slowdown," said Brian Jackson, a strategist with Royal Bank of Canada in Hong Kong.

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