January 17, 2020 / 2:48 AM / a month ago

Instant View: China's economic growth slows to 6.1% in 2019, near 30-year low

(Reuters) - China’s economy grew 6.0% in the fourth quarter of 2019 from a year earlier, official data showed on Friday, in line with expectations and steadying from the previous quarter’s pace.

FILE PHOTO: Cranes are seen above piles of steel pipes to be exported at a port in Lianyungang, Jiangsu province, China, December 1, 2015. REUTERS/China Daily

The growth rate continued to hover at the weakest in nearly three decades.

The world’s second-largest economy grew an annual 6.1% in 2019, the slowest in 29 years, but still within the government’s target of 6-6.5%. Analysts had expected it to expand 6.1% in 2019, down from 6.6% in 2018.

Facing sluggish demand at home and abroad and escalating U.S. trade pressure, Chinese policymakers have been rolling out a stream of growth boosting measures over the past two years, while trying to contain financial and debt risks.

KEY POINTS

**Q4 GDP +6.0% y/y (f’cast +6.0%, 2018 +6.0%)

**Q4 GDP +1.5% q/q (f’cast +1.5%, prev +1.5%)

**December industrial output +6.9% y/y (f’cast +5.9%, prev+6.2%)

**December retail sales +8.0% y/y (f’cast +7.8%, prev+8.0%)

**Jan-December fixed asset investment +5.4% y/y (f’cast+5.2%, Jan-Nov +5.2%)

**Jan-December property investment +9.9% y/y (Jan-Nov 10.2%)

MARKET REACTION

Asian stocks rose on Friday after China released its GDP data, adding to modest early gains. The yuan firmed slightly.

COMMENTARY:

MICHELLE LAM, GREATER CHINA ECONOMIST AT SOCIETE GENERALE, HONG KONG

“It was the receding damage of the trade war that has supported the stabilization of GDP growth in Q4. In consumption, retail sales growth is also stabilizing, showing that the spending momentum is still pretty resilient despite downward pressure on labor market.

“One downside risk (to 2020 growth) is property investment (slowing). It contributed towards strong land sales in 2018 and construction activity in 2019. But a large part of that was sold in advance, whereby real estate companies do not deliver houses until two to three years later.”

MARTIN RASMUSSEN, CHINA ECONOMIST, CAPITAL ECONOMICS

“Despite the recent uptick in activity, we think it is premature to call the bottom of the current economic cycle. External headwinds should ease further in the coming quarters due to the “Phase One” trade deal and a recovery in global growth. But we think this will be offset by a renewed slowdown in domestic demand, triggering further monetary easing by the People’s Bank.”

YASUO SAKUMA, CHIEF INVESTMENT OFFICER AT LIBRA INVESTMENTS, TOKYO

“China’s GDP data was in line with expectations. Today’s data soothed some market fears since investors had developed concerns about China economy after seeing that Japan’s machine tool orders data slumped in December mainly due to weak demand from China.”

MASASHI HASHIMOTO, SENIOR CURRENCY ANALYST, MUFG BANK, TOKYO

“There were rebounds in some areas, such as fixed income investments and industrial output, which is in line with other signs that China’s deceleration is coming to an end. But we still need to see a bit more data to confirm that.

“The yuan strengthened a bit on the notable uptick in the data. We have been expecting the yuan to weaken.

“But markets seem to be reacting more positively than we have estimated to the deal, as China and the U.S. appear to have stopped slapping tariffs on each other even though it’s unclear if they can reach a Phase 2 deal. We might consider revising up our yuan forecast a bit.”

TOMMY XIE, CHINA ECONOMIST AT OCBC BANK, SINGAPORE

“The small V-shape recovery in nominal GDP reinforced our view that the Chinese economy may have stabilized in the near-term due to trade truce and more supportive policies.

“The removal of uncertainty from trade truce and China’s increasing support to high-tech manufacturing sectors will continue to lift manufacturing sectors.

“The key disappointment came from infrastructure investment, which decelerated further to 3.8% from 4% despite all the supportive measures such as green light for local government special bond as capital for infrastructure projects etc. This shows that local governments continued to face funding constraints due to a breakdown of implicit guarantee and rising default risks in China.”

MASAAKI KANNO, CHIEF ECONOMIST, SONY FINANCIAL HOLDINGS, TOKYO

“China’s GDP data was not so surprising, and basically in line with our expectations, both in terms of quarterly change and annual change. We expect China’s growth rate will (come) further down to below 6% next year.

“The Chinese economy is unlikely to fall abruptly because of ... government policies, but at the same time the trend of a further slowdown of the Chinese economy will remain unchanged.”

DANIEL GERARD, SENIOR MULTI-ASSET STRATEGIST AT STATE STREET GLOBAL MARKETS

“This is all good news and positive for the China story. We are not going to see an acceleration of growth at this point (in 2020). Managing that slowdown is what they (policymakers) worry about.

“The lower rates provided to banks have not been filtering through to the consumer and that’s something China has to get a handle on. The tricky part is that the government’s hands are a bit tied in lowering RRR much further if they want to protect against the risk to banks’ leverage ratios.”

WOEI CHEN HO, ECONOMIST, UOB, SINGAPORE

“The annual numbers are what we were expecting. Secondary industries seem to be stabilizing, but there is a bit more concern with tertiary industries. It is worrying, because that was actually driving the growth for much of 2019 ... and will be a key growth driver ahead.

“We haven’t changed our growth forecasts for a slowdown next year to 5.9%.

“That’s very much in line with structural reforms in China and diversification of companies away from China. The stabilization in U.S.-China relations is positive, but will not be able to catalyze a strong growth recovery in China as most of the tariffs are still in place.

“The central bank is looking at lowering costs for businesses, and that might continue this year at a gradual pace rather than being stepped up gradually.”

RAJIV BISWAS, ASIA PACIFIC CHIEF ECONOMIST, IHS MARKIT, SINGAPORE

“This is a good data outcome. It’s pretty much close to market expectations that growth in China was over 6% for calendar 2019, and, also, the fourth quarter (data) shows that the economy has been quite resilient.

“The strength of domestic expansion in China along with the rebound in manufacturing that we are seeing in the latest data, and also the good news on the Phase 1 trade deal, which will help to boost Chinese exports, are all positives for the Asia Pacific manufacturing supply chain to China.

“A key risk for the 2020 outlook on the domestic front would be if there was any weakness in private consumption. If we were to see signs of some loss of momentum in retail sales that would be a concern because consumption is such a strong growth engine now for the Chinese economy.”

SHUANG DING, HEAD OF CHINA ECONOMIC RESEARCH AT STANDARD CHARTERED, HONG KONG

“The most important story here is that growth did not fall below 6%. Growth in 2020 is most likely to be stabilized given the lagged impact of the previous policy and forward-looking data, including credit (total social financing) data yesterday, and the government’s emphasis on supporting the economy, including local bond issuance to support infrastructure.

“Monetary policy will still be supportive of fiscal stimulus in 2020. We expect two more RRR cuts, 50 basis points each this year … and they will also likely cut MLF moderately by 20 basis points in the first half of the year.”

LOUIS KUIJS, HEAD OF ASIA ECONOMICS AT OXFORD ECONOMICS, HONG KONG

“I think it (stabilization of growth) is sustainable. We have seen efforts (from policymakers) to make sure economy continues to grow. The risks to China are still largely on the external side. We cannot rule out things happening in Washington or the bumps in the road for the global economy.

“We still think China is in for slowdown later on, it’s in the midst of a structural slowdown. We have stabilization 2020, but after 2020 we do think there will be more structural slowdown.”

BACKGROUND:

- China’s economic growth has been slowing amid weak domestic and export demand, with pressure compounded by an escalating trade war with the United States. A government crackdown on debt and riskier types of financing in recent years have also led to a softening in investment.

- Authorities have rolled out a stream of stimulus measures including tax cuts, higher infrastructure spending and liquidity injections by the central bank, but domestic demand has been slow to respond.

- Washington and Beijing signed a Phase 1 trade deal on Jan 15, declaring a ceasefire in the trade row, but the United States will maintain most of the tariffs on Chinese imports which it imposed during the dispute.

- Economic growth is expected to slow further to 5.9% in 2020, a Reuters poll showed, reinforcing views that Beijing will need to roll out more policy support measures.

- The central bank is expected to cut banks’ reserve requirement ratios (RRR) by another 100 basis points (bps) by the end of 2020, on top of a 50 bps cut announced this month, which was the eighth since early 2018.

- China is also expected to cut its one-year loan prime rate (LPR), its new benchmark lending rate, by a total of 25 bps this year.

- Top officials have repeatedly vowed not to unleash massive “flood-like” stimulus similar to that announced in past economic downturns, which left a mountain of debt. Corporate bond defaults hit a fresh high last year, while state-linked firms rescued several troubled smaller banks.

Reporting by Noah Sin, Kevin Yao, Tom Westbrook, Hideyuki Sano, Daniel Leussink, and Tomo Uetake; Compiled by Sherry Jacob-Phillips

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