China's economic recovery unexpectedly stumbled in the first
three months of 2013 with slowing factory output and investment spending
forcing analysts to start slashing full-year forecasts despite official
insistence that the outlook was favorable.
Growth in GDP dropped to 7.7% year-on-year, down from 7.9%
in the fourth quarter of 2012. That’s below the consensus forecast of 8% growth
from a Wall Street Journal survey of economists, and raises fears that the
recovery at the end of last year is already losing steam.
The market remains far ahead of the government’s estimates,
which still has Chinese GDP growth hovering closer to 7.5% for the next couple
of years (Rapoza, 2013) .
The pace of sequential growth continued to be the subject of
controversy. Based on the National Bureau of Statistics data, the annualized
quarter-on-quarter growth rate came in at 6.6%, down from 8.2% in the fourth
quarter of 2012. But investment bank economists continued to publish their own
calculations. Louis Kuijs, China economist at RBS, put sequential growth at
6.1%, down from 9.5% at the end of 2012 (Orlik, 2013) .
One of the few bright spots in the data: evidence that the
rebalancing of China’s economy is underway. Domestic consumption contributed
4.3 percentage points to China’s growth in the first quarter, compared to a 2.3
percentage point contribution from investment, said National Bureau of
Statistics spokesman Sheng Laiyun. “Now we can say consumption has become the
major driver of growth,” he said. Seasonal effects might also be at work – the
first quarter is typically strong for consumption.
The Federal Reserve Bank of San Francisco took some of the
fun out of looking at China’s alternative indicators, concluding that they told
roughly the same story as the official data . But for what it’s worth, new
Premier Li Keqiang’s preferred measures of growth – bank loans, electricity
consumption, and rail freight — continued to present a less favorable picture.
Electricity consumption registered shocking 1.9% year-on-year growth in March.
China’s government wants domestic consumption to do more of
the work of driving growth. But retail cash registers in the first quarter
showed little signs of ringing faster. Growth in retail sales dipped to 12.6%
year-on-year in March, a marked slowdown from 15.2% at the end of 2012.
One possible factor is the government’s crackdown on
official banqueting and excess. That’s difficult to quantify, but a sharp
deceleration in spending at restaurants – which grew just 8.7% year on year in
March – gives the theory some credibility. Century Plaza Hotel, a four-star
hotel in the southern export hotspot of Shenzhen, is one that saw feast turn to
famine in 2012. Zhang Jing, board secretary, said she saw no improvements in
the first quarter. “It’s definitely inseparable from the current economic and
policy situation,” she said.
China’s labor markets continued to tell a positive story.
The ratio of labor demand to labor supply rose to 1.1 in the first quarter, up
from 1.08 at the end of 2012 and a record high. Strong hiring is a sign China’s
firms have a positive outlook and are taking on more workers (in Chinese).
Tight labor markets should also mean rising wages,
supporting high consumption. But the evidence on wages in the first quarter was
mixed. Average pay packets for migrant workers rose at a respectable 12.1% rate
year-on-year. But average disposable income for urbanites rose just 6.7% in
real terms, down from 9.6% in 2012 and dipping below the growth rate of the
economy.
At the start of the year, exports appeared to be a bright
spot in the data, with growth touching 25% year-on-year in January. But that
moderated to 10% in March, and inconsistencies in the data between China and
major trade partners suggested the real growth rate could be even lower.
Reports of surging exports to Hong Kong, at the same time as
Hong Kong recorded only modest gains in imports from China, suggested something
was amiss – perhaps factories exaggerating sales to claim tax rebates or avoid
capital controls.
Li Zhongjian, head of Tungfong Lighter in Zhejiang’s
Wenzhou, was feeling the burn, with overseas sales down 33% year-on-year in the
first quarter. “The labor cost is a big problem for us, it’s really hard to
operate at the moment,” he said.
China’s trade imbalances showed signs of rising again. The
trade surplus for the first quarter came in at $43.5 billion, up substantially
from $1.1 billion in the same period last year. The latest current account data
from China’s State Administration of Foreign Exchange points in the same
direction.
After a revision to the historical data, China’s current
account surplus as a share of GDP troughed at 1.9% in 2011, and rose to 2.3% in
2012 (pdf in Chinese). That’s only a small increase, and leaves the current
account surplus at a moderate level. But it also supports the argument that the
yuan remains some distance from fair value (Orlik, 2013) .
The People’s Bank of China was more active in the markets,
keeping the yuan within a narrow band against the dollar. Appreciation of
China’s currency slowed to an annualized rate of 1.1% in March, down from 3.5%
in December. A larger trade surplus combined with a slower rate of yuan
appreciation threatened to raise political tensions with the U.S.
A big part of the reason for resilient growth is surging
credit. Bank loans and other forms of finance came in at 6.1 trillion yuan in
the first quarter, a record high. Moves by the People’s Bank of China to drain
liquidity from the markets from the start of February appear to have had little
impact, with a large part of the surge in credit coming in March.
That allayed fears of a sharp downturn. But it raised fears
of higher inflation and a burgeoning credit bubble. China’s consumer price
index remained muted, with a 2.1% year-on-year increase in March. But with
increases in money supply growth hitting a heady 15.7%, and wages also rising
fast, price pressure remains a risk.
So far monetary policy has remained essentially on hold,
with no change in bench mark interest rates or pronounced attempts to drain
liquidity from the financial system. With growth disappointing, it’s difficult to
see Beijing making early moves to tighten policy. But in an inflationary
environment, the scope to keep the lending taps open to buoy growth is also
limited (Rapoza, 2013) .
Evidence of a second successive quarter of rising
year-on-year growth will further reinforce the view of investors that China's
government has successfully engineered a recovery from 2012's 13-year low of
7.8 percent that is gaining traction.
Meanwhile with the annual rate of consumer inflation
expected to ease to 2.4 percent from February's 10-month high of 3.2 percent,
the urgency for policymakers to begin tightening monetary conditions at an
early stage in the recovery cycle is reduced.
"We estimate GDP grew at a faster year-on-year pace of
8.1 percent in Q1," analysts at China International Capital Corp (CICC)
wrote in a note to clients, outlining their calls for the March data cycle.
That is above the 8.0 percent consensus of 19 economists
polled by Reuters and is driven largely by expectations of a stronger than
anticipated contribution to growth of real estate sales.
CICC analysts calculate that property sales will contribute
about 1 percentage point more to growth in Q1 than in Q4 last year, offsetting
slowing growth in wholesale, retail and other industries.
Retail sales growth has been curtailed in recent months
since the government launched an internal austerity drive at the end of last
year, designed to cut down excessive banqueting and gift-giving that is often
linked to corruption.
Economists in the Reuters poll expect retail sales to have
expanded by 12.5 percent in March, slightly higher than the 12.3 percent rate
seen in the combined January-February period, but still around 2-3 percentage
points lower than typically seen through 2012.
Fixed asset investment, closely tied to real estate
transactions, has seen a gentle upswing since around the middle of last year
when China's Communist Party government decided to take action to underpin economic
growth hit by faltering demand for the country's exports. Gross exports account
for around a third of economic output in China and a drop off in orders as the
United States and the European Union - the country's two biggest customers -
dealt with their own economic problems was felt through the Chinese factory
sector. Fixed asset investment is forecast to have expanded at an annual pace
of 21.3 percent year-to-date in March, a whisker higher than the 21.2 percent
pace in the first two months of 2013.The downside risks to economic growth,
however, are similarly tied to real estate, investment in which was worth 13.8
percent of GDP in 2012 and directly impacts around 40 other business sectors in
the economy. Rising real estate prices, alongside rising fixed asset
investment, have sparked concerns that home costs could start to spiral out of
control and lead the government to declare that a raft of measures to calm
frothy prices must be strictly enforced. That has led investors to start
fretting that tighter property policies could constrain the overall economy (Reuters,
2013) .
That is a significant risk given that construction was the
main driving force behind a rise in the fast-growing services sector of the
economy in March, according to a survey of purchasing managers. The real estate
crackdown was one of the key reasons cited by Bank of America/Merrill Lynch in
late March when it cut its Q1 annual growth forecast to 7.9 percent from 8.3
percent." At present we see more downside than upside risk to our 7.9
percent year-on-year Q1 forecast," the bank wrote in a note to clients,
outlining its March data forecasts.
Bibliography
Orlik, T. (2013, April 15). China Real time
report China’s Economy: The First Quarter. Retrieved April 2013, 16, from
Wall Street Journal:
http://blogs.wsj.com/chinarealtime/2013/04/15/chinas-economy-the-first-quarter-2/
Rapoza, K. (2013, April 15). China's Economy
Underperforms In First Quarter, But Locals Rake In More Yuans. Retrieved
April 16, 2013, from Forbes :
http://www.forbes.com/sites/kenrapoza/2013/04/15/chinas-economy-underperforms-in-first-quarter-but-locals-rake-in-more-yuans/
Reuters. (2013, April 3). Reuters. Retrieved
May 6, 2013, from www.reuters.com:
http://www.reuters.com/article/2013/04/03/us-china-economy-gdp-idUSBRE9320DA20130403
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