China’s growth took a step back in April after a surprisingly strong start to the year, as factory output to investment to retail sales all tapered off as authorities clamped down on debt risks in an effort to stave off a potentially damaging hit to the economy. Waking up to the systemic threat posed by cheap credit-fueled stimulus since the 2008-9 global financial crisis, Beijing has continued to tighten the screws on speculative financing over the past several months.
Data on Monday highlighted the broad economic impact of these regulatory curbs, with below-forecast factory output in April and fixed-asset investment in the first four months of the year reinforcing evidence of a weakening manufacturing sector and slowing momentum in the world’s second-biggest economy. “If anything (the slowdown) is even faster than we expected,” said Julian Evans-Pritchard at Capital Economics in Singapore in an interview before the data was released. However, “we’re still some way off from the economy weakening to the point where it will test the tolerance of policymakers…as the urgency to address some of these financial risk issues (is even greater),” he said.
Factory output was up 6.5 percent in April from a year earlier, down from 7.6 percent in March, and fixed-asset investment rose 8.9 percent in the first four months of the year, off the 9.2 percent pace in Jan-March. Analysts polled by Reuters had predicted factory output would grow by 7.1 percent in April, and tipped fixed asset investment to rise 9.1 percent in Jan-April.
Output growth slowed on tumbling steel and iron ore prices amid concern over rising inventories after China’s mills cranked out as much metal as possible to drive factory production to its highest since December 2014. However, on a volume basis, steel output hit a record in April, data Monday showed, stoking worries of a growing glut as demand remains flat even as China says it is ahead of schedule on capacity reduction targets.
Fixed asset investment in the manufacturing sector also slowed over Jan-April, with growth of 4.9 percent down from 5.8 percent in the first quarter. Infrastructure spending, however, continued to grow over 23 percent year-on-year in the same period, supported by Beijing’s Belt and Road initiative to expand investment links with Asia, Africa and Europe.
Analysts say Beijing is keen to ensure steady economic growth ahead of the 19th Communist Party Congress later in the year. Chinese leaders have pledged to shift the emphasis to addressing financial risks and asset bubbles which analysts say may pose a threat to the Asian economic giant if not handed well.
China’s central bank has been guiding short-term interest rates higher to help contain debt perils, though it is treading cautiously to avoid hurting economic growth. A red-hot property market, fueled by speculative investments, has been identified by analysts and policymakers as one of the biggest risks to growth.
Monday’s data showed investment in property development picked up in April, although sales growth was significantly slower, suggesting investment in the sector remained robust even as intensified government controls to rein in the market began to take effect. The area of property sold grew 7.7 percent year-on-year in April, the lowest since December 2015 and well short of the 14.7 percent increase in March.
Retail sales rose 10.7 percent in April from a year earlier, weaker than March’s 10.9 percent gain as home appliances and automobile sales growth slowed from March. At the same time, growth in the services sector slowed to 8.1 percent year-on-year, down from 8.3 percent growth in March and the slowest since December.
“Slowing domestic consumption growth and softer external demand appear to have driven the slowdown in China at the start of the second quarter,” Capital Economics’ Evans-Pritchard said in a note following the data release. The country’s first quarter economic growth came in at a faster-than-expected 6.9 percent, the quickest since 2015 on higher government infrastructure spending and a gravity-defying property boom.
China has cut its economic growth target to around 6.5 percent this year to give policymakers more room to push through painful reforms and contain financial risks after years of debt-fueled stimulus. But with the ambitious new Silk Road global development initiative and the Xiong’an “satellite” capital plan, analysts don’t expect China to stray too far from the investment-led growth model.
Indeed, Chinese President Xi Jinping’s Xi on Sunday pledged an additional $124 billion for the Belt and Road initiative. “Growth will continue to be underpinned by a strong infrastructure pipeline which also echoes the Belt and Road initiative and urbanisation projects like Xiong’an,” ANZ economists Raymond Yeung and Betty Wang wrote in a note. “China seems to have returned to an investment-driven growth strategy.”