Chinese Economic Growth Slows, Stimulus Pondered

by Patrick Brennan

China got into the Friday-afternoon news-dump game last week, releasing a range of disappointing economic indicators. The Wall Street Journal reports:

China’s economy slowed sharply in April—from industrial output to bank lending to foreign trade—throwing cold water on expectations for a rapid recovery in the world’s main growth engine, and putting pressure on Beijing to shift policy decisively into stimulus mode.

The poor results likely came as a surprise to China’s top policy makers. At the end of April, Chinese Premier Wen Jiabao predicted—incorrectly—that trade figures would show both healthy domestic demand as well as recovering appetite for Chinese exports. The slowing economy adds another layer of uncertainty as China deals with the political fallout from the ousting of former political highflier Bo Xilai, and prepares for its once-in-a-decade change in leadership. . . .

China’s economy grew at 8.1% in the first quarter, compared to the year-earlier period, its slowest pace of growth since the spring of 2009, and analysts had widely expected a rebound in the current quarter. But that now looks unlikely and several analysts downgraded their forecasts. “We were wrong,” said Lu Ting, Bank of America’s China economist, who cut his second quarter forecast on Friday to 7.6%, year-over-year, from 8.5%

Growth in industrial production dipped to 9.3% in April from 11.9% in March, the lowest level since May 2009. That fall in output reflected broad based weakness across investment, consumption, and exports—the three main drivers of China’s growth. Growth in electricity output, often seen as a proxy for the health of China’s industrial sector, fell to 0.7% year-to-year, down from 7.2% in March.

The government’s two-year effort to deflate the housing bubble also put the brakes on economic activity. Housing sales, by area, fell 14.9% in the first four months of the year. Weak demand dented incentives for developers to invest in new projects. The area of new residential property under construction shrank 7.9% in the year to April from the same period in 2011. . . .

In contrast to the U.S. and many European governments, China’s public finances are strong, creating space for a fiscal stimulus. The Ministry of Finance has remained conservative so far this year, with a fiscal surplus of 874 billion yuan ($138 billion) in the first four months. Ratcheting up public spending on infrastructure and public housing in the months ahead is one option to support growth, though it would take time for the projects to get under way and affect the economy much.

When China boosted infrastructure spending in 2009 and 2010, in response to the global financial crisis, it did so largely through increased lending, which supported growth but also increased real-estate prices and raised fears of a spate of bad loans. The government is wary of undertaking a similar crash-lending program.

China has announced that it will cut the reserve requirements for banks to encourage stimulative lending, though another WSJ piece quotes a Goldman Sachs analyst saying that “lowering the reserve-requirement ratio to 20% was simply a ‘signaling device used by the government to show its willingness to loosen policy,’ and wouldn’t itself have much effect on the economy.”

China may be in a far stronger fiscal position than, say, Europe or the United States, but given the huge amount of government-subsidized credit that local governments already push onto the market, it seems like there won’t be much they can do to avert this slowdown. Combined with the political problems Beijing has been trying to keep a lid on (they are “seriously considering” delaying this fall’s Party Congress by a few months), there seems to be a growing likelihood of significant instability in China. 

UPDATE: The FT’s Alphaville has a good rundown of all the problematic numbers, and notes that Chinese economic statistics really aren’t to be trusted — local governments are encouraged to inflate various figures, etc. A harder-to-manipulate indicator and one that tracks GDP closely is electricity output:

The Corner

The one and only.