If expectations are low, beating them doesn’t mean much. China’s GDP grew by 7.4% year-on-year in the first quarter of 2014, a notch above the market consensus of 7.3%.
But after three months of mainly gloomy economic data, analysts weren’t betting on a powerful punch in overall growth figures. The stats from March alone give reason to believe that China has yet to rebound from a tough start to the year. As for giving the economy a gentle fiscal nudge, Beijing has likely said all it intends to on that matter with some targeted measures in recent weeks. China Economic Review thinks that’s just fine as long as economic reform keeps abreast.
March was a tough month with the important numbers slowing across the board. Fixed-asset investment slowed again to 17.4% from 17.9% in February. Property investment dropped to 14.2% year-on-year growth from 19.3% in the first two months of the year. Societe Generale noted that new property starts plummeted to -22% in the first quarter of the year after growing at 33% in the last quarter of 2013. The drop is alarming and bodes poorly for the real estate market in the coming months.
At 8.8%, industrial production in March chinned only slightly above the disappointing figure from the first two months of the year. But the uptick can be misleading. It came off of a sharp decline in March 2013 when factory output, a pulse reading on the steel and cement markets, dropped one percentage point. The low base for comparison should have helped the figure look strong but it didn’t.
Many experts are predicting an even worse second quarter of the year. “We maintain our view that GDP growth is on a downward trend and we will continue to expect it to slow to 7.1% in Q2,” Nomura Research said in a report following the release of the GDP data on Wednesday.
The investment bankers looking to sell China have extolled the recent “mini-stimulus” or “fine-tuning” package that will boost investment into select areas of the economy such as rail and dilapidated neighborhoods and cut taxes for small and medium enterprises. The government made such pledges in what appeared to be a response to ugly February data. Some analysts cheered.
“We believe Premier Li [Keqiang]’s vow to expand tax rebates to small enterprises, accelerate the shanty town renovation and construction, and increase railway investment using both public and private funds will also help propel the growth momentum in Q2,” ANZ Bank said in a note on Wednesday, adding that a cyclical upturn was already underway.
The fiscal help might be hyped, though. Many of the measures that the government announced in March were already on the agenda. The premier simply corralled the efforts into what sounds like a more cohesive plan, perhaps with the intention of lifting confidence in the market. It should also be remembered that, at the Boao financial summit in Hainan province last week, Li said he would focus on “healthy economic development,” ruling out chances for a more forceful stimulus push in 2014
A lack of support from Li and his entourage at the State Council has led many to look to the People’s Bank of China for relief. In March, total social financing, or TSF, China’s broadest measure of credit growth, expanded more than expected at RMB2.07 trillion. But lending usually rises rapidly in March and the TSF figure for the first quarter of 2014 lagged compared to last year.
The market is now waiting to see if PBOC will use some of the monetary tools at its disposal to get money moving through the system. An obvious option is to cut the reserve requirement ratio for big banks, an explicitly pro-growth move in the face of the country’s many other challenges. Consensus among analysts is mixed, with some saying a slight cut is imminent given the first quarter GDP data and a lowering of the ratio to certain county-level banks. Others say the central bank will wait to see how the light fiscal boost of the mini stimulus will impact the economy.
China Economic Review would like to reflect on some of the maxims that have been thrown around during the past year to chart out the best course of action in the first half of 2014.
“The core of reform in China today is deleveraging the economy altogether,” an economist from Moody’s said at a conference in Shanghai late last year. That’s a good starting point for policymakers in 2014. Allowing lenders to hold less cash in reserve would be a signal for them to boost lending, something that will work against goal of delivering an economy addicted to credit. Instead, the government should push banks to increase lending to only healthy customers, something they are capable of doing with the current level of liquidity in the market.
While repeated many times, Premier Li continues to point out that “the biggest economic dividend will come from reform.” Those returns will come far slower than those from a powerful stimulus package or loosened monetary policy but they won’t come laced with the same kind of financial risk that unbridled credit growth has already wrought on the economy.
GaveKal Dragonomics analysts say the biggest challenge this year is maintaining a public sense that reforms are still moving along even as the country continues to report insipid economic data. Staying the course with reforms and deleveraging might be the strongest signal that leaders are determined to put the Chinese economic juggernaut on the right path to development.