May 24, 2013 / 3:25 PM / 7 years ago

Rosy China growth forecasts fade on further signs of slowdown

BEIJING (Reuters) - As evidence mounts that China’s economy is losing momentum, economists are fast abandoning their rosy recovery forecasts and bracing for what could be the country’s slowest growth rate in 23 years.

Employees work inside a factory which makes bearing cages in Liaocheng, Shandong province May 24, 2013. REUTERS/Stringer

In the space of five months, analysts have swung from confidently predicting a modest pick-up in the world’s second-biggest economy to pondering the chance that China will miss its own 7.5 percent growth target this year.

Concerns that Beijing’s growth target may be under threat came to the fore on Thursday, when a preliminary survey of Chinese factories showed manufacturing activity shrank for the first time in seven months in May after both new domestic and export orders fell.

“Yes, the 7.5 percent target is under threat,” said Ken Peng, an economist at BNP Paribas in Beijing.

“China does not have a recession, but there will not be a recovery.”

Unlike previous years when any wobble in the Chinese growth engine was countered with heavy government intervention to stabilize activity, economists are counting on things being different this time.

There will be no big-bang stimulus like the 4 trillion yuan ($652 billion) package unveiled after the 2008/09 financial crisis to spur growth, analysts say. Instead, leaders appear to be banking on China adjusting to a new norm of slower and hopefully better-quality growth that requires less state planning.

Sources close to Beijing told Reuters this week that China’s plan to spend $6.5 trillion to urbanize its economy is running into snags as the government weighs the pros and cons of another spending binge that would escalate local debt problems and likely add to inflationary pressures.

Just how much growth will cool without policy action is difficult guesswork, but a string of underwhelming Chinese economic data have led some economists to contemplate worst-case scenarios of growth sinking below 7 percent in 2013.

“What investors are worried about is whether the situation in China right now is a lot more menacing than growth slowing to the 7 handle,” Tao Wang said in a note this week after cutting her 2013 gross domestic product forecast to 7.7 percent, from 8 percent.


It was always a close call.

Forecasts of a mild economic revival in China were predicated on activity picking up to 8 percent in 2013, quickening a shade from last year’s 7.8 percent, which was the worst showing in 13 years.

And calls for an economic cooldown now centre on growth dipping below 8 percent, but still above the government’s increasingly-vulnerable 7.5 percent target.

The last time China’s growth sunk below 7.5 percent was in 1990, when the economy expanded by just 3.9 percent.

Even before Thursday’s dismal survey results of Chinese factories, a host of banks had started slashing their 2013 growth estimates for China, and more are set to do so.

Bank of America-Merrill Lynch pared its growth forecast this month to 7.6 percent from 8 percent, Standard Chartered cut its estimate to 7.7 percent from 8.3 percent, and ING last month reduced its prediction to 7.8 percent from 9 percent.

BNP Paribas, Credit Suisse and Societe Generale are all in the midst of revising their 2013 growth forecasts.

To complicate matters, analysts cite different reasons for what is hobbling China’s economic growth, which unexpectedly eased in the first quarter after an initial promising rebound fizzled in just three months.

Lackluster wage growth, which is at a five-year low, is the biggest drag on consumption, some say. A government campaign to curb wasteful public spending is also hurting retail sales.

Others say anemic growth in factory output and trade is offsetting resilient investment, while some argue that government infrastructure spending has waned amid tighter state controls over alternative financing.

Global demand also has remained stubbornly weak, with the euro zone now in its longest-ever recession, offsetting some signs of improvement in the United States.

Slideshow (2 Images)

One of the rare points of agreement is that China’s property sector - the one industry that the government wants to slow - is ironically on a rebound.

The other is that China’s days of double-digit economic growth rates are over, and that the economic structure needs to be changed to let consumption overtake investment as the most important driver of growth.

“What the last couple of months has shown is that we have exhausted this China growth model and what we need now is the next China growth model,” said Alistair Thornton, an economist at IHS. ($1 = 6.1340 Chinese yuan)

Editing by Kim Coghill

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