China economy: reactions to latest data
Published 17 September 2014
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Summary
Latest data point towards an accelerating slowdown. The re-introduction of small-scale, targeted stimulus policies looks likely as the authorities seek to stablise growth, consistent with this year’s more flexible growth target. Provided the labour market remains healthy, a more forceful reaction from the authorities is seen by observers as less likely.
Detail
Latest Chinese macroeconomic data show that the economy continues to slow. In particular, industrial production (IP) came in significantly below expectations, with August growth of 6.9 per cent (year-on-year), compared with 9.0 per cent growth the previous month. Fixed asset investment (FAI) also slowed, registering year-on-year growth of 13.3 per cent in August, down from 15.6 per cent in July. Data published in the week of 8 September on the property market and lending figures were also consistent with a slow-down.
Comment
China’s economy has resumed its slow-down, following a short-lived resurgence in Q2 this year. The IP figure was the lowest recorded since December 2008, when China was in the midst of the global financial crisis. Year-on-year FAI registered its slowest growth since December 2011. The main cause of this deceleration continues to be weakening investment, especially property investment, on the back of gradually slowing growth in credit.
Growth for 2014 Q3, which will be published in October, now looks likely to be around 7.3 per cent (year-on-year). This is lower than the 7.4 per cent recorded for Q1 and the 7.5 per cent for Q2 and it would represent the lowest quarterly growth figure since 2009 Q1. The authorities’ growth target for 2014 is ‘around 7.5 per cent’. If momentum continues to slow into Q4, the lower band of this target, seen to be around 7.2-7.3 per cent, would be tested. Full year growth of 7.5 per cent could only be achieved with significant stimulus.
Premier Li’s recent speech at Tianjin’s Summer Davos stressed the need to both push ahead with structural reform and to avoid short-term stimulus: “we won’t be distracted by short-term fluctuations in individual economic indicators and will maintain focus on structural adjustments and dealing with long-term issues”. Li would have had access to the latest data when he made this speech.
The authorities are prioritising other indicators above GDP growth, with the most important being employment. At Davos Li said that 9.7 million urban jobs had been created between January-August this year. This compares with a full-year target of 10 million new urban jobs and is 100,000 more than for the equivalent period last year (which itself was a record year for employment generation).
This reflects China’s changing economic composition. The services sector overtook manufacturing as a proportion of GDP for the first time last year. Services industries are much more labour-intensive than manufacturing. This trend is being accelerated by structural reforms. For example, official figures show how new business registrations are up more than 60 per cent year-on-year this year, supported by reforms such as the significant reduction on capital requirements for new firms that was introduced earlier this year.
However, commentators do not expect the authorities to allow the slow-down to accelerate further. Completely missing the growth target would have significant damaging, pro-cyclical implications for China’s fiscal policy, which is based on the target. It could also destabilise business expectations, leading to a further deceleration in investment decisions, which would affect employment further down the line. Policy intervention earlier this year showed again that the authorities have the tools needed to stabilise short-term growth.
Most observers therefore see the most likely scenario in the coming weeks as the re-introduction of targeted stimulus measures, again focused around selective credit easing and the acceleration of priority investment projects in areas like social housing and the railways. Cushioning the pace of China’s economic deceleration while not trying to actually arrest the process entirely is seen as good for China’s longer term economic sustainability.
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