Premier Li talks of challenges and promises measures as shocked analysts predict loosening of tight monetary policies, reports Team IFM
Beijing, March 14: The speed of China’s industrial output growth slowed beyond expectations in the first two months this year to a five-year low, official data released on Thursday showed, prompting Premier Li Keqiang to publicly dwell on “severe challenges” in the year ahead and strengthening earlier independent studies that questioned official factory output claims.
Premier Li’s warning also bolstered prediction, being made for long, that the country’s central bank would loosen monetary policy to support stuttering growth.
According to China’s National Bureau of Statistics, production at factories, workshops and mines went up 8.6 per cent in January and February compared to a year-ago period, but previous data showed this was the slowest increase since April 2009, when it rose 7.3 per cent.
The slowdown, which spanned across sectors from retail to investment, caught economists off-guard despite their expectations of a growth at 9.5 percent that was slower than that officially projected. For Liu Li-Gang, a Hong Kong-based economist at ANZ Bank, it was “terrible” news. “I wasn’t expecting high figures,” Liu was quoted by The Wall Street Journal as saying. “But this is worse than I thought.”
The period under review, January and February, coincided with the Chinese Lunar New Year holiday period when shipments are advanced and made China watchers to question the official line that higher order executions meant higher productions.
In February, Chinese officials also announced its trade surplus rose to $31.86 billion in January from $25.6 billion the previous month, and that its foreign fund inflows had jumped 16 per cent year-on-year, reflecting a robust industrial scenario.
However, independent studies had said otherwise, and were more in keeping with Thursday’s official data, with figures from economy tracker Markit saying February was the worst month for China’s manufacturing sector since last August.
A key gauge of factory performance – the HSBC Purchasing Managers’ Index or PMI – was at a seven-month low in February, Markit’s data had showed.
“The building-up of disinflationary pressures implies that the underlying momentum for manufacturing growth could be weakening,” Qu Hongbin, Chief Economist, China and Co-Head of Asia Economic Research at HSBC, had said in a statement.
“We believe Beijing policy makers should and can fine-tune policy to keep growth at a steady pace in the coming year.”
China Gloom
Qu’s prediction was echoed across board once again after Premier Li’s Thursday statement warning that “severe challenges” lay ahead. In a guarded statement at a press conference on the last day of China’s annual parliament, he touched upon a wide range of issues including the Malaysian Airlines mystery.
But he also talked of economic challenges, and boldly announced that despite the pitfalls, steps would be taken to check a growth slide. He said Beijing had set a GDP growth target of 7.5 per cent in 2014 as compared to 7.7 per cent last year.
“We believe we have the ability, and all the means, to ensure that economic growth will stay within a reasonable range this year,” Li said. “We are not preoccupied with GDP growth.”
Earlier, Li Keqiang had said China could manage with growth of 7.2 per cent, but on Thursday, he refrained from mentioning a minimum level of growth that was acceptable. His only contention was that he would be satisfied with any growth level that created employment.
Li also said financial and fiscal reforms were on the anvil, which once again kindled expectations that bank deposit rates would be liberalised and efforts would be made to streamline debt.
Since last month, with news of contraction in new orders and production trickling in, analysts started predicting Beijing would in no way sit quietly. First Shanghai Securities strategist Linus Yip told Reuters he expected Beijing to act if the economy slowed down any more.
“They cannot proceed with their reform agenda without maintaining a certain level of growth,” Yip was quoted as saying.
Zhiwei Zhang, an economist at Japanese financial holding company Nomura similarly said he expected Beijing to act.
“We reiterate our view that the recovery in China is not sustainable and that GDP growth will slow to 7.5 per cent year-on-year in the first quarter and 7.1 per cent in the second,” he said.
“We expect the government to loosen monetary policy in the second quarter to support growth.”
After Thursday’s official announcement, Société Générale China economist Wei Yao joined the economists predicting monetary policy changes. “He can’t say, ‘Give up on growth’, and he can’t say, ‘Growth at any cost,’” Wei told The Wall Street Journal.
Early Signs
Actually, there were already signs that everything was not as rosy as made out to be. After two confidence-boosting announcements in February, news emanated from behind the Great Wall that said February was the worst month for China’s manufacturing sector since last August.
In tune with all-round scepticism, China’s manufacturing contracted in February, the non-official Markit data showed, bolstering belief that contrary to the official stance, the dragon was actually undergoing a slowdown.
February’s flash reading of the HSBC China Manufacturing PMI moderated further as new orders and production contracted, “reflecting the renewed destocking activities,” Markit said.
Listing its key findings, Markit said the flash China manufacturing PMI stood at 48.3 in February, down from 49.5 in January, marking a seven-month low. Similarly, the preliminary manufacturing output index was at 49.2, a decline’s from the previous month’s 50.8also a seven-month low.
The data compiler said business conditions deteriorated “at moderate pace in February”, a development that could partially be attributed to the Chinese Lunar New Year festivities from January 31, China’s biggest festival, when commercial establishments including factories shut down operations for several days.