1. China’s economic growth slows to 7 pct in Q1, six-year low

China’s economic growth slows to 7 pct in Q1, six-year low

China's economy grew 7.0 percent in the first quarter, as expected but still its slowest rate in six years, reinforcing bets that policymakers will take more steps to bolster growth.

By: | Beijing | Updated: April 15, 2015 11:01 AM
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China’s economy grew 7.0 percent in the first quarter, as expected but still its slowest rate in six years, reinforcing bets that policymakers will take more steps to bolster growth. (Reuters)

China’s economy grew 7.0 percent in the first quarter, as expected but still its slowest rate in six years, reinforcing bets that policymakers will take more steps to bolster growth.

Economists polled by Reuters had expected China’s gross domestic product (GDP) to rise 7.0 percent in January-March compared with a year ago.

In the last quarter of 2014, China’s economy grew 7.3 percent on an annual basis.

On a quarterly basis, economic growth slowed to 1.3 percent between January and March after seasonal adjustments, the National Bureau of Statistics said on Wednesday, compared with growth of 1.5 percent in the previous three months.

Analysts had expected quarterly growth of 1.4 percent.

Activity indicators for March were all weaker than expected.

Factory output climbed 5.6 percent in March from a year ago, below forecasts for a 6.9 percent gain.

Fixed-asset investment, a vital driver of the economy, rose 13.5 percent compared with the same month last year. Analysts had expected a rise of 13.8 percent.

Retail sales expanded 10.2 percent compared with expectations for a 10.9 percent gain.

The disappointing data supports analysts’ predictions for China’s economic growth to slide to 7 percent this year, the lowest in a quarter of a century.

KEY POINTS
Q1 GDP +7.0 pct y/y (f’cast +7.0 pct, prev +7.3 pct)
Q1 GDP +1.3 pct q/q (f’cast +1.4)
March industrial output +5.6 pct (f’cast +6.9 pct)
March retail sales +10.2 pct (f’cast +10.9 pct)
Jan-March fixed asset investment +13.5 pct (f’cast +13.8 pct)

COMMENTARY:
YAO XUEKANG, ANALYST, ESSENCE SECURITIES, BEIJING
“The Q1 GDP growth matches the market expectation, but is not quite compatible with the factory output and growth in the service sector. Growth in factory output is quite disappointing, meaning very limited impact has been triggered from the central government’s determination to keep economic growth steady. 7 percent is the baseline for Beijing, and there are chances that the growth for this year can be lower than 7, judging from the current huge economic downward pressure.”

ZHU QIBING, ANALYST, MINZU SECURITIES, BEIJING
“It’s certain that the government will relax monetary policy, but it could use various measures rather than just cutting RRR or interest rates. It may continue cutting guidance on the benchmark 7-day reverse repurchase (repo) and release its short-term lending facility data every month to increase  transparency. But if it cuts RRR, this month will a good timing.”

TIM CONDON, ECONOMIST, ING, SINGAPORE
“What was disappointing most was surprisingly weak industrial production.

“For the first quarter, obviously the weakness in trade has translated into weak manufacturing. That implies that services and construction are picking up, offsetting a lot of the weakness.

“If the authorities have trouble keeping interbank rates where they want them, then I’m sure  RRR cuts will be forthcoming.”

ZHOU HAO, ECONOMIST, ANZ BANK, SHANGHAI
“The overall economic situation is very weak. China is still facing high economic downward pressure, and it is very imminent to roll out both financial and monetary easing policy. In addition, there are chances that growth for the whole of 2015 can drop to below 7 percent.

“The factory output is very weak. There are several reasons causing the slide in March power output. Beijing’s decision to remove overcapacity from some sectors has shown some effects. But more importantly, the electricity demand was capped by sluggish product demand.”

LOUIS KUIJS, CHIEF CHINA ECONOMIST, RBS, HONG KONG
“Both a policy rate cut and bank reserve ratio cut are likely. We were already expecting both to happen, but I think this data, especially the fact that there doesn’t seem to be an improvement in March… probably will increase the pressure and the likelihood for at least one more cut in benchmark interest rates.

“I also expect monetary policy on the quantitative side to be subject to a more accommodative stance. What the policymakers are trying to do there is to make sure there is sufficient lending coming from the core banking sector as they have tightened up on the shadow banking industry.

“(Full-year) growth will not be much below 7 percent, simply because policymakers do not want it to happen and they have the arsenal, they have the ammunition to prevent that from happening.”

ZHANG YIPING, ECONOMIST, CHINA MERCHANTS SECURITIES, SHENZHEN
“The possibility of (further) interest rate and RRR cuts in Q2 is very small. One of the main considerations for policymakers is the labour market. But if deflation pressure grows and the labour market deteriorates, the government may act more to contain this trend.”

YANG ZHAO, CHANG CHUN HUA, WENDY CHEN, ECONOMISTS, NOMURA
“The weaker Q1 GDP growth and much weaker than expected March activity data suggest that growth momentum remains weak, which calls for further policy easing. We maintain our call of one more interest rate cut and one more reserve requirement ratio cut coming in each of the three remaining quarters this year.

“With the effects of previous policy easing starting to be felt, we expect growth momentum to improve on a sequential basis. However, given a high base from last year, the year-on-year GDP growth rate is likely to slow to 6.6 percent in Q2 before rising in H2. We maintain our annual GDP growth forecast at 6.8 percent.”

QI YIFENG, MACRO ANALYST, CEBM GROUP, SHANGHAI
“The growth rate is higher than expected, as all evidence pointed to GDP growth of lower than 7 percent. But it doesn’t change our view that China needs to cut either RRR or interest rate every month during the next three to six months to keep the economy from slowing further, because all other data we see, such as industrial production, exports, power generation etc all look terrible.

YU PINGKANG, CHIEF ECONOMIST, HUATAI SECURITIES, SHENZHEN
“The weakest part of the economy comes from the manufacturing sector, which reflected in the sluggish industrial output data. It might indicate that the government’s fiscal policy, especially infrastructure investment, is not yet taking effect to stimulate the economy. Overall, all data show weak domestic demand and consumption with sluggish manufacturing sector. But we think the economy is likely to stablize slightly in the second quarter if the government sticks to the current fiscal policy and continue to support the money markets”

“On the policy perspective, RRR cut is very likely in the short term, but we think it might not be the most appropriate solution to the current economic weakness as money will not flow into the real economy.”

“The first quarter will be the worst one for this year, so I don’t think the overall GDP for 2015 will go below 7 percent.”

ANDREW COLQUHOUN, HEAD OF ASIA-PACIFIC SOVEREIGNS, FITCH RATINGS:
“We expect real GDP growth of 6.8 percent this year and 6.5 percent next year. Slower growth should not be viewed as bad news if it means the economy is adjusting to a more sustainable path.

“But the adjustment needs support from consumption while the economy adapts to slower investment. It’s sobering that the economy has become so reliant on construction and real estate to generate jobs. The ongoing correction in real estate sector poses the biggest single risk to Fitch’s outlook.

“Meanwhile, the March foreign reserves data show a further drop in reserves, which puts a squeeze on monetary conditions – as we can see in the deceleration of aggregate financing in March. This means the People’s Bank of China needs to do something on monetary policy just to stand still, so we should expect further loosening.”

PAUL TANG, CHIEF ECONOMIST, BANK OF EAST ASIA, HONG KONG
“In the short run, we don’t expect to see much change from the current (weak) environment, and it is possible to see the (GDP) growth to fall below 7 percent (in the coming quarter). Thus, there is a chance to see a cut in interest rate and bank reserve ratio, while there is a need to cut one more time for both in the second half of this year.”

“We still maintain 7 percent GDP growth forecast for 2015, expecting economic growth in the U.S. to give support to China’s exports.”

NIE WEN, ANALYST, HWABAO TRUST IN SHANGHAI
“The 7 percent GDP growth was in line with our expectation, but industrial output and fixed asset investment were well below our expectation. It indicates the government needs to relax its monetary policy in a relatively big scale. We expect a RRR cut or interest cut this month. RRR cut could be at between 50 and 100 basis points.”

KEVIN LAI, SENIOR ECONOMIST, DAIWA, HONG KONG:
“If you look at Q1, exports were poor, industrial production was poor, FAI was much slower, retail sales soft, so how can GDP in real terms still be 7 percent? In reality, growth must be much lower than that. I don’t think looking at the GDP number is meaningful.

“Yes there will be easing, but there won’t be a lot of easing either. We still have at least one more interest rate cut, one more RRR cut in our forecasts. If they don’t do anything, the real economy will keep suffocating and the ultimate end game will be quite ugly.”

MARKET REACTION
China’s stock indexes, rallying since Beijing began easing monetary policy in November, were up slightly after the data, with the CSI300 index .CSI300 up around 0.4 percent.
The Australian dollar weakened on the news.

BACKGROUND
– China’s government has fixed a growth target of around 7.0 percent for 2014.
– In 2014,  China had growth of 7.4 percent.
– March exports surprisingly fell 15 percent year-on-year, while a poll had expected a 12 percent increase.

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