Bloomberg News

China Growth Slows to 7.5% as 2013 Target Under Threat

July 15, 2013

China’s Economy Grows 7.5% Amid Risk of Deepening Slowdown

Pedestrians walk past a Louis Vuitton store as it stands illuminated at night in Shanghai. Retail sales in June rose 13.3 percent from a year earlier after a 12.9 percent increase in May. Photographer: Tomohiro Ohsumi/Bloomberg

China’s economy slowed for a second quarter as growth in factory output and fixed-asset investment weakened, adding to risks that the government will miss its expansion target as Premier Li Keqiang reins in a credit boom.

Gross domestic product rose 7.5 percent in April-to-June from a year earlier, the National Bureau of Statistics said in Beijing, equaling the median forecast in a Bloomberg News survey and down from 7.7 percent in the first quarter. June production growth matched the weakest pace since the 2009 global recession.

The slowdown may increase speculation that policy makers will act to safeguard their growth goal of 7.5 percent for the year even as Li signals reluctance to boost stimulus and tries to reduce financial risks. With the International Monetary Fund last week cutting its outlook for global expansion, Li’s administration faces limits on turning to exports for support.

“The new government under Mr. Li should be seriously worried about the prospect as to whether they can meet the growth target,” said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong, who formerly worked at the World Bank.

Expansion (GDPNTTLY) should stabilize this quarter and may rebound in the following period “if monetary policy can quickly adjust to reflect the rapidly changing domestic and external environment and fiscal policy can be more active by targeting effective investment projects and technology upgrading,” Liu said. “Otherwise, the growth trajectory is heading to less than 7 percent.”

Stocks Advance

Second-quarter growth was the slowest in three periods and extended the longest streak of sub-8 percent expansion in at least two decades.

The Shanghai Composite Index (SHCOMP) gained 1 percent at the close, while the Australian dollar rose. Investors may have taken the view that “no bad news is good news,” as today’s GDP number matched estimates, said Zhu Haibin, JPMorgan Chase & Co. chief China economist in Hong Kong. The MSCI Asia Pacific Index was up 0.1 percent at 4:12 p.m. in Tokyo.

Sheng Laiyun, a spokesman for the statistics bureau, said at a briefing today that the world’s second-biggest economy will have no problem achieving the 2013 growth target. The agency said in a statement that first-half growth was “generally stable,” with major indicators in a “reasonable range.”

“However, we are still faced with grim and complicated economic situations,” the agency said.

Shipyard Aid

One such situation may be China Rongsheng Heavy Industries Group Holdings Ltd., the nation’s biggest shipyard outside state control, which said this month it’s seeking financial help from the government. Hebei Iron & Steel Co., the country’s largest producer of the metal by volume, warned last week its first-half net income will fall by 70 percent to 90 percent as the nation’s steel supplies outpace demand and prices drop.

China’s industrial production rose 8.9 percent in June from a year earlier, today’s report showed. That compared with the 9.1 percent median forecast and a 9.2 percent gain in May. Last month’s pace matched the slowest since 2009, excluding figures for January and February, which the government doesn’t publish separately because of distortions from the weeklong Chinese New Year holiday.

Retail sales in June rose 13.3 percent from a year earlier after a 12.9 percent increase in May. The median forecast was for an increase of 12.9 percent.

Fixed-asset investment excluding rural households increased 20.1 percent in the January-to-June period from a year earlier, compared with the 20.2 percent median estimate in a Bloomberg survey and a 20.4 percent gain in the first five months.

Property Pressure

The transaction value of home sales rose 24 percent in June from the previous month, the biggest monthly gain this year, according to today’s data, signaling the government’s property curbs are failing to deter buyers. Sales in the first half of the year rose 46 percent to 2.82 trillion yuan ($459 billion), the data showed.

The government still faces pressure regulating the property market, Sheng said at today’s briefing.

Xia Bin, a former adviser to China’s central bank, said in a commentary on China Business News’s website today that “there is a de facto phenomenon of economic crisis in China.” The “eruption” of a crisis means bankruptcy for some companies and financial institutions, higher unemployment, reduced corporate and individual wealth along with a “withering of the economy,” Xia wrote.

Nomura Holdings Inc. today forecast the nation will lower banks’ reserve-requirement ratio four times by a total of 2 percentage points through June 2014. It also cut its economic growth estimate for next year to 6.9 percent from 7.5 percent, partly on the expectation the government will set a 7 percent expansion target for 2014.

Prolonged Deleveraging

JPMorgan also reduced its projection for economic growth this year to 7.4 percent from 7.6 percent and lowered next year’s forecast to 7.2 percent, according to an e-mailed note today.

“China has likely entered a prolonged period of deleveraging, which will last well into 2014,” Zhang Zhiwei, Nomura’s chief China economist in Hong Kong, said in a report.

The National Development and Reform Commission, China’s top economic-planning agency, approved just two new projects in June though more may come in the next few months along with supportive policies, Haitong International Securities Group said in a note today. Meantime, approved projects are having trouble getting off the ground, with state radio reporting yesterday that some local governments are having difficulty raising capital to build subway lines.

Cash Squeeze

Any new projects would require financing that’s become harder to obtain after the cash squeeze last month. Data last week showed the broadest measure of new credit, known as aggregate financing, was the smallest in 14 months, and a Finance Ministry report today indicated fiscal spending rose 3 percent from a year earlier, down from a 12 percent pace in May.

Capital spending by non-financial corporations in China may fall by 4 percent this year and 6 percent in 2014, Standard & Poor’s said last week, citing a survey of 91 Chinese companies.

People’s Bank of China Governor Zhou Xiaochuan reiterated today that the nation will maintain a prudent monetary policy, according to a transcript of his comments made during a teleconference on financing for small and medium-sized enterprises.

Yao Wei, China economist at Societe Generale SA in Hong Kong, said in a note today that the “new leaders’ tough love stance will not be easily swayed, at least not by this latest set of data.”

No Stimulus

“We continue to see limited chance of any significant monetary easing or infrastructure stimulus from Beijing in the near term, and so economic growth is expected to step down further” in the second half, Yao wrote.

Elsewhere in Asia, India said wholesale-price gains accelerated to 4.86 percent in June. A U.K. property report showed home sellers raised asking prices for a seventh month to a record in July while data to be released in the U.S. include the Federal Reserve Bank of New York’s manufacturing survey and June retail sales.

The IMF last week lowered its estimate for 2013 global growth to 3.1 percent from a 3.3 percent forecast in April, including a China projection of 7.8 percent. Goldman Sachs Group Inc., HSBC Holdings Plc and Barclays Plc last month reduced their estimates to 7.4 percent, which would be the weakest pace since 1990.

The government in March set a 2013 growth target of 7.5 percent and has a goal for an average 7 percent during its current five-year plan that runs through 2015.

Growth Tolerance

Comments by Li last week that growth should remain above a certain unspecified floor and Finance Minister Lou Jiwei’s remarks that 6.5 percent or 7 percent growth wouldn’t be a “big problem” added to confusion about where the government’s tolerance would end.

Lou, speaking at a press briefing in Washington, where Chinese officials were meeting with U.S. counterparts, said this year’s expected growth rate is 7 percent and China can reach that. The official Xinhua News Agency later corrected its English-language report on Lou to say there’s no doubt that China can achieve this year’s growth target of 7.5 percent.

Sheng, the statistics bureau spokesman, said today that while he didn’t know if 7 percent was the government’s bottom line for tolerating slower growth, he said that the line “is definitely changeable, it won’t be fixed at one point.” Any rate that’s helpful for growth, employment and deepening reform “should be deemed above the bottom line,” he said.

“We expect Premier Li’s cabinet to introduce some fiscal expansionary policies on a limited scale to arrest the slowdown,” Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong, said in a note today. The central government will take over more of the spending burden from local governments while emphasizing infrastructure construction to combat pollution and support consumption, Lu said.

--Nerys Avery, Zhou Xin. With assistance from Liu Li, Kevin Hamlin and Tian Ying in Beijing, Ailing Tan and Shamim Adam in Singapore and Emma Bi in Hong Kong. Editors: Scott Lanman, Nerys Avery

To contact Bloomberg News staff for this story: Xin Zhou in Beijing at xzhou68@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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