The Chinese economy posted its weakest rate of growth in three years after real GDP growth in 1Q12 moderated to 8.1%. China’s PMI for May released by the National Bureau of Statistic eased more than expected — to 50.4 compared to 53.3 in April.
It seems that last month’s estimates of economic activity underestimated the pace of the slowdown in industrial production. Although the government has stepped up efforts on policy easing, uncertainty has grown over the performance of the economy in 2Q12.
Looking to 2H12, the risks associated with China’s economic growth have recently grown significantly, driven mainly by the Euro-zone’s economic crisis. With increasing signs of a deceleration in economic growth, the government has intensified its efforts to address structural imbalances.
Given the fact that the annual rate of inflation now is now below 4%, the recent cut in the benchmark interest rate by the Central Bank has been interpreted as a move to boost economic activity by lowering the cost of borrowing from the banking system. However, many observers expect more interest rate cuts in the coming months. Also the reserve requirement ratio was reduced by 50 basis points effective 18 May.
This is the third reserve ratio cut in six months and is in line with the Central Bank’s statement that targeted action would be taken to ensure stable credit growth. Pressure to appreciate the yuan against the US dollar is also expected to ease in 2012, given the downward trend in the country’s trade surplus and the recent strength of the US dollar.
Constrained credit demand has brought renewed calls for the government to provide a fiscal stimulus to the economy (EIU Country Report, June 2012). The Chinese government has already taken steps in this direction. Government spending increased 26% on an annualized basis in January-April, above the 12.5% increase in revenue.
Low unemployment and a steady increase in real wages reduced the imperative to intervene. Having brought down inflation in recent months, it might be seen imprudent for the government to overstimulate the economy and thereby risk a return of elevated inflation. Therefore, a dramatic softening of fiscal policy seems unlikely — unless GDP growth falls below the government’s comfort zone of around 7-7.5%. China’s recent moves towards liberalizing aspects of its capital account and ensuring a more flexible exchange rate have been welcomed by the US, reducing frictions between the two economic powerhouses. The US has welcomed the Chinese government’s pledge to cut indirect taxes and increase dividends paid by state-owned enterprises for public spending. These measures are expected to support private consumption and boost import demand.
Amid growing uncertainty in the global economy, China’s declining foreign trade surplus, as well as the weaker than expected performance of industrial sector, modest growth (0.7%) in electricity output and a slowdown in the growth of cement production (from 7.3% in April to 4% in May) have all raised concerns over the pace of China’s economic slowdown. The weakness of the industrial sector is related to the property sector, which continues to depress demand for important industrial products (EIU Country Report, June 2012).
A major part of commodity imports is related to construction activity and a mere 0.3% growth in imports of commodities in April has revealed a weakness in demand for investments in the housing sector. The downward correction in property prices engineered by government imposed restrictions on house purchases appears to be gathering pace.
Housing sales fell 11.8% y-o-y in January- April. Given that developers are reluctant to add to their stock, the area of land bought for property development dropped 19.3% during that same the period (EIU Country Report, June 2012). External demand also continued to soften, mainly due to the EU’s sovereign debt crisis. Exports increased by 4.9% y-o-y to US$163 bn in April, following growth of 8.9% in March. China’s imports from Taiwan fell sharply — by 7.8% on an annualized basis — in April. Table 3.3 below gives the latest official information on China’s manufacturing PMI and related indices.