China Q1 GDP growth could be weakest since financial crisis

[SHANGHAI] China's economy may have grown at its slowest pace since the global financial crisis in the first quarter of 2016, highlighting the headwinds the world's second largest economy still faces despite recent signs of stabilisation.

Growth in first quarter gross domestic product (GDP) likely slowed to 6.7 per cent from the same period last year, down from 6.8 per cent in the fourth quarter of 2015, according to a Reuters poll of 64 economists. GDP data is due 0200 GMT Friday.

That would be the weakest pace of expansion since the first quarter of 2009, when growth fell to 6.2 per cent. China's economy grew 6.9 per cent in 2015, its slowest rate in more than two decades.

While China is currently showing some economic green shoots, analysts say the central bank is likely to keep monetary policy accommodative to hit economic growth targets this year and help heavily indebted industrial firms refinance expensive debt.

"In the first quarter, we saw some stabilisation in March for the real part of the economy, and property investment also rebounded in January and February," said Yang Zhao, chief China economist at Nomura in Hong Kong. "But in terms of the contribution of the financial sector in the first quarter, it's going to have significantly retreated. That's why we think the overall GDP will continue to slow down from the fourth quarter," he said.

Despite drags from softer global demand, over-investment in key sectors and weakening productivity among state-owned firms, recent signs of a pick-up in real estate, industry and trade provide reasons for optimism.

Annual growth in fixed asset investment quickened to 10.2 per cent in January and February combined from 10 per cent in the whole of 2015, while industrial profits during those two months unexpectedly rose by 4.8 per cent from a year earlier, ending a seven-month declining streak.

March export figures also staged an unexpected recovery, although some economists caution that seasonal effects from last year's late Lunar New Year holiday could be a factor.

Capital outflows, a major concern at the end of 2015, also appear to have eased in recent months along with the dollar's rise.

POLICY CHALLENGES

Despite the positive signs, one major policy challenge could come from rising consumer price rises, if sustained. "Consumer price index inflation is already higher than the one-year deposit rate, meaning the room for additional rate cuts is limited," said Ding Shuang, head of Greater China economic research at Standard Chartered in Hong Kong.

"But bank required reserve ratio cuts will continue as they will be necessary to achieve the 13 per cent money supply growth target this year," he said.

China's central bank has engaged in an extended easing campaign since late 2014, most recently releasing an estimated US$100 billion for lending by cutting bank reserve ratios in late February. Policymakers have also said they intend to ramp up fiscal support for the economy in 2016, boosting the fiscal deficit to 3 per cent of GDP.

While signs of a near-term bottoming out in industrial activity and investment are welcome, diverging global interest rates, a housing glut in smaller cities, and softer growth in the service sector remain as key threats.

Some economists have warned that weakness in manufacturing would eventually spill into slower income growth and softer demand for services.

A private sector survey from Caixin and Markit showed service sector employment contracted in March for the first time in more than two and a half years.

Moreover, economists say high corporate debt, declining investment returns and an aging population mean the medium-term growth outlook remains firmly downwards.

REUTERS