China

China's Slowing Growth Points to More Easing Ahead


Cotton yarn at a factory in Dali county, Shaanxi province, China.

Photograph by Nelson Ching/Bloomberg

Cotton yarn at a factory in Dali county, Shaanxi province, China.

It’s been a week of weak numbers for the Chinese economy, suggesting more easing measures could come later this year. While China’s central bank has reduced bank reserve requirements twice recently, once in November and again in February, interest rates have not been cut since the global financial crisis in 2008; one-year lending rates are now at 6.56 percent.

On April 23, the HSBC purchasing managers index had a preliminary reading of 49.1 for April, a slight improvement over March but still the sixth consecutive month showing a contracting economy (as indicated by any reading below 50). The Monday Flash PMI (“flash” because it is preliminary) is based on responses from more than 400 companies and shows they are expecting a continued economic slowdown. If confirmed when the final reading comes out May 2, it would be the longest slump since the global financial crisis.

Then, to cap off the week, the National Bureau of Statistics announced April 27 that profits at China’s industrial companies during the first quarter dropped 1.3 percent, to 1.04 trillion yuan ($165 billion). February saw a slight rise, with profits up 4.5 percent over a year before. Total sales of industrial companies (including only those with annual revenue over 20 million yuan) grew 14.1 percent in the first three months, to 19.8 trillion yuan, the bureau announced Friday. Ferrous metal smelting and chemicals both had particularly dismal performances during the first quarter, with profits down 83.5 percent and 23.1 percent, respectively. “Rising purchase prices, weak sales growth and increasing manufacturing costs caused the profit decline,” the Xinhua news agency reported April 27, citing statistics bureau official He Ping.

Companies have also struggled as exports have slowed, and importantly, policy makers have continued with measures aimed at cooling property prices. “China’s real estate market now accounts for a huge share of the growth in a whole range of [China’s] industries,” pointed out Nicholas Lardy, senior fellow at the Peterson Institute for International Economics in Washington, in a telephone interview on April 20. He said that in 2011, real estate made up 9 percent of gross domestic product, far higher than the 6 percent reached in the U.S. at its peak.

Residential property sales dropped 18 percent in the first quarter, while housing prices in more than half of 70 cities surveyed fell in March, the sixth straight month of declines for major metro areas, including Beijing, Shanghai, Guangzhou, and Shenzhen. China’s economy grew at 8.1 percent in the first quarter, its slowest pace in almost three years. China’s economy still faces  “downward pressures,” said a report released by an April 13 State Council meeting chaired by Premier Wen Jiabao.

Dexter_roberts
Roberts is Bloomberg Businessweek's Asia News Editor and China bureau chief. Follow him on Twitter @dtiffroberts.

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