China's economy stumbles in May, growth seen sliding in Q2

BEIJING Sun Jun 9, 2013 5:16pm EDT

A construction worker looks at Pudong financial district as he wait to cross an avenue in Shanghai in this May 30, 2013 file photo. REUTERS/Carlos Barria/Files

A construction worker looks at Pudong financial district as he wait to cross an avenue in Shanghai in this May 30, 2013 file photo.

Credit: Reuters/Carlos Barria/Files

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BEIJING (Reuters) - Risks are rising that China's economic growth will slide further in the second quarter after weekend data showed unexpected weakness in May trade and domestic activity struggling to pick up.

Evidence has mounted in recent weeks that China's economic growth is fast losing momentum but Premier Li Keqiang tried to strike a reassuring note, saying the economy was generally stable and that growth was within a "relatively high and reasonable range".

China's economy grew at its slowest pace for 13 years in 2012 and so far this year economic data has surprised on the downside, bringing warnings from some analysts that the country could miss its growth target of 7.5 percent for this year.

"Growth remains unconvincing and the momentum seems to have lost pace in May," Louis Kuijs, an economist at RBS, said in a note. "The short-term growth outlook remains subject to risks and we may well end up revising down our growth forecast for 2013 further."

Exports posted their lowest annual growth rate in almost a year in May at 1 percent, exposing a more realistic picture of trade following a crackdown by authorities on currency speculation disguised as export trades to skirt capital controls, which had created double-digit rises in export growth every month this year even as world growth stuttered.

May exports to both the United States and the European Union - China's top two markets - both fell from a year earlier for the third month running.

Imports fell 0.3 percent against expectations for a 6 percent rise as the volume of many commodity shipments fell from a year earlier.

The volume of major metals imports, including copper and alumina, fell at double-digit rates. Coal imports fell sharply.

"The trade data reflects the sluggish domestic and overseas demand, signaling a slower-than-expected recovery in the second quarter," said Shen Lan, an economist at Standard Chartered bank in Shanghai.

A government factory survey of purchasing managers and a similar poll sponsored by HSBC, both issued earlier this month, showed export orders falling in May, suggesting the outlook remained grim.

Inflation, bank-lending growth and investment were below expectations in May, while factory output and retail sales rose around the same pace as in April.

China's consumer inflation slowed to 2.1 percent, the lowest in three months, while producer prices (PPI) fell 2.9 percent, the lowest since September. A Reuters poll had forecast consumer inflation at 2.5 percent and factory-gate prices down 2.5 percent.

"The inflation data showed China's economic growth continued to slow down. Second-quarter growth is probably even slower than the first quarter. In particular, the PPI data showed very weak demand," said Jianguang Shen, chief China economist at Mizuho Securities Asia in Hong Kong.

Central bank data showed Chinese banks made 667.4 billion yuan ($109 billion) in new loans in May, below market expectations of 850 billion yuan and down from April's 792.9 billion yuan.

M2 money supply rose 15.8 percent from a year earlier, slightly below a median forecast of 15.9 percent, while total social financing, a broad measure of cash in the economy, was 1.19 trillion yuan versus 1.75 trillion yuan in April.

Retail sales, fixed-asset investment and industrial output met expectations, rising 12.9 percent, 20.4 percent and 9.2 percent from a year earlier, respectively.

RATES AND OTHER REMEDIES

Economic growth slipped to 7.7 percent in the first quarter, down from 7.9 percent in the previous quarter. Both the International Monetary Fund and the Organization for Economic Co-operation and Development cut their forecasts for China's economic 2013 economic growth in May, to 7.75 percent and 7.8 percent, respectively.

But the further loss of momentum in the April and May could prompt the central bank to try to give the economy a lift, said Jian Chang, China economist for Barclays in Hong Kong.

"We had expected an L-shaped economic recovery in China and that the growth would stabilize at around 7.9 percent," Chang said.

"We now think China's growth will stabilize at around 7.6 percent (this year). The possibility for the central bank to cut interest rates is now rising," Chang said.

However, government economists from top think-tanks in Beijing told Reuters this week that the new leadership of President Xi Jinping and Premier Li will tolerate quarterly growth slipping as far as 7 percent year-on-year before looking to lift the economy, focusing on economic reforms rather than short-term stimulus.

Li was quoted by state television as saying that China's economy was generally stable, while China Central TV reported that Xi told U.S. President Barack Obama during his visit to the United States that "we are confident of maintaining long-term sustainable economic growth".

He acknowledged China was at a "critical moment of economic restructuring" but that it would bring "enormous" potential, the TV said.

Cutting interest rates would be a difficult decision for the central bank for fear that providing cheaper credit could exacerbate a rise in property prices, which policymakers have been trying to contain.

"Property prices will jump if it cuts rates as recent government cooling measures have not achieved desired results," said Tang Jianwei, senior economist at Bank of Communications in Shanghai.

"And cutting rates may not be effective in slowing speculative money inflows, which are mainly driven by expectations of yuan appreciation."

Most economists agree however that the government will avoid major stimulus along the lines of its 4 trillion yuan package unleashed in the global financial crisis in 2008. It sparked a lending boom, which fuelled a property bubble and left local governments under a pile of debt.

The new leadership is keen to push economic restructuring towards domestic consumption and away from reliance on exports and investment for growth.

Sources told Reuters in May that a consensus had been reached among top leaders that reforms would be the only way to put the world's second-largest economy on a more sustainable footing.

(Additional reporting by Kevin Yao; Editing by Neil Fullick)

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Comments (4)
m2grs wrote:
China has come to a point where real estate speculation trumps everything else in term of profit generation. The income growth from those who actually do honest work cannot keep up with growth in housing prices. Housing price to income ratio has reached stratosphere. A small flat costs the equivalent of 30 years of income for an average double income family.

It is a society that has become extremely unfair and hopeless.

Jun 10, 2013 2:35am EDT  --  Report as abuse
ncshu2 wrote:
The major reason for the artificially inflated export figures in the past lie not only in the currency speculation, but also in large part to extract the governmental export subsidies. To promote export, Chinese government offers subsidy to all exporting manufacturing enterprises, in the form of partial tax remittance. Thus even the currency exchange rate is flat, the enterprises still have the incentive to exaggerate their export figures.

Jun 10, 2013 5:28am EDT  --  Report as abuse
DDearborn wrote:
Hmmm

The Western media is desperate to convince the western world (US in particular) that the Chinese economic machine has stalled. They say that growth has “leveled off” They imply this is not just a slow down but a reversal that will have grave economic implications. People China has had growth rates that are triple that of the US for well over a decade now. They continue to growth rates that are triple the US and most of the Western World. The Chinese economic machine is now on autopilot. The shear size and mass of the biggest economic machine in history will ensure it’s continued success for decades. This period in Chinese rebirth is very similar to the US in the early 1950′s. The only difference is that the size and scope will dwarf the US. The world’s largest untapped market for China’s output is……China. In very short order they will no longer need the US to be their primary market. In 10 years the US dollar will be a footnote. And in 20 years the US economy will just be another little blip relative to China’s gigantic (internal) economic machine. China has reached critical mass and for the foreseeable future can continue maintain significant growth based on internal demand alone. Which is of course why the worlds largest corporations and the richest men that own them bought into china back in the 90′s and early 2000′s for pennies on the dollar. That is why the likes of GM, IBM, INTEL, you name it have essentially switched their corporate focus (and in many cases their defacto corporate HQ’s) to China.

Jun 10, 2013 10:38am EDT  --  Report as abuse
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