It has become something of a routine for the Chinese economy: a sluggish start to the year fuels market concerns before more supportive policies from Beijing put growth back on track by the year’s end.
The first half of this routine, which played out in both 2012 and 2013, is once again in full swing. Data published yesterday showed that just about every part of the Chinese economy, from factory floors to shopping malls and building sites, had a dreary start to 2014. Commodities that are closely tied to Chinese growth such as copper and iron ore have come under heavy selling pressure.
The question that will determine the fate of the Chinese economy over the rest of this year and beyond is whether the second half of the routine – a shift to more stimulative policy – will also be repeated. With China’s leadership duo of President Xi Jinping and Premier Li Keqiang pledging to press ahead with deep structural reforms after their first full year in office, the answer is more uncertain than in the past.
“We have always viewed the new leaders as less pro-growth, but such a sharp slowdown is probably still more than they can stomach,” said Wei Yao, an analyst with Société Générale.
The depth of China’s downturn at the start of this year has surprised analysts. Yesterday’s data were the first comprehensive picture of China’s economy in 2014 (January and February numbers are published together to smooth out distortions caused by the timing of the lunar new year).
Industrial output slowed to 8.6 per cent year on year in the first two months of 2014, down from 9.7 per cent in December and missing forecasts of 9.5 per cent. It was the lowest reading for industrial output, which closely tracks overall economic growth, since August 2009.
Property sales, which in the past have served as a leading indicator for Chinese commodity demand, were exceptionally weak. They fell 3.7 per cent year on year, down from last year’s increase of 26.3 per cent. Fixed-asset investment and retail sales also dropped.
The slowdown in China is in large part a product of the government’s own efforts to contain financial risks after a surge in debt levels over the past five years.
In the second half of 2013, the central bank drained cash from the economy to drive up funding costs and also clamped down on “shadow banks”. Mr Xi has also railed against corruption and lavish spending by officials, a campaign that has taken a toll on consumption more broadly.
In China’s annual ersatz parliament, which concluded yesterday, the government kept its headline target for 2014 unchanged from 2013 at “about 7.5 per cent” growth.
But in contrast with previous years, officials have emphasised the flexibility of the target. This has led some analysts to conclude the government will stick to its more hawkish line.