China's economy slows in Q4 to weakest pace since 2009 amid trade war

[BEIJING] China's fourth quarter economic data confirmed a slowdown in activity amid a debt cleanup and trade woes, though some signs emerged that the deceleration will be less severe than feared.

Gross domestic product rose 6.4 per cent in the fourth quarter from a year earlier, the slowest pace since the 2009 financial crisis, and compared with 6.5 per cent in the previous three-month period. In December, gauges of consumption and factory output accelerated, while investment held up.

The world's second-largest economy is on a long-term slowing trajectory as it shifts from the investment-led model of the past while carrying a heavy debt load. The government's control of that process is being tested by the standoff with US President Donald Trump over trade at a time when the global expansion is already looking shakier.

Authorities have used an array of targeted and limited stimulus measures to try and revive optimism without resorting to massive stimulus, as they have in past downturns.

"Growth will improve from the second quarter onwards," said Morgan Stanley's chief China economist Robin Xing in an interview with Bloomberg Television in Hong Kong. "The greater the downward pressure on growth, the stronger the policy response will be."

The data contributed to a continued rally in Asian stocks. Shares in Tokyo, Hong Kong and Sydney climbed after the S&P 500 Index hit its highest since early December on Friday.

For the full year, the economy expanded 6.6 per cent, in line with estimates. Although it has moderated significantly from the years of double-digit growth, China is still one of the fastest growing large economies and its larger size now means it remains the world's growth engine.

So far, the government and central bank have tried to stimulate the economy without resorting to a massive credit flood and infrastructure binge like in 2009. The People's Bank of China has been quietly guiding interbank borrowing costs down without actually cutting official interest rates, and the fiscal authorities have pressed on with tax cuts and expedited government bond sales, among other policies.

With President Xi Jinping's top economic aide Liu He heading to the US this month, the challenging economic background adds pressure to reach a deal on trade. According to people close to the discussions, the two sides have so far made little progress on the issue any deal Trump strikes with China may ultimately be judged on: ending what the US has dubbed as decades of state-coordinated Chinese theft of American intellectual property.

Due to the massive size of its market, China's slowdown is also bringing pain to companies and industries worldwide. Auto sales in the most populous nation dropped for the first time in three decades last year, hurting prospects of not only local manufacturers but also of companies such as Volkswagen AG and Toyota Motor Corp.

Meantime, a downturn in iPhone sales in China has hurt Apple Inc's share price this month and raised question marks over whether the consumer can keep cushioning the economy's re-balancing away from the old smokestack industries.

If the slowdown deepens, authorities may resort to more aggressive easing such as relaxing property purchasing curbs in the biggest cities, economists have speculated.

"More crucial than the GDP figure for me was that retail sales didn't see any further deterioration," said James Laurenceson, deputy director of the Australia-China Relations Institute at the University of Technology in Sydney. "As long as services and retail sales are holding up, generally speaking China can get by. But if those remaining drivers of growth start to tank, then the trouble becomes very significant indeed."

BLOOMBERG