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Putting a brave face on China’s grim data
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PESSIMISM seems to have been gaining the upper hand since China finished the release of economic data for January and February last week.Financial institutions are lowering their forecasts for China’s growth prospects, triggering a new wave of hard-landing predictions and calls for an easing of policies.The debate has gone so far as to suggest, in some quarters, that China suspend its reform efforts, which have been given top priority this year by national leaders.
Zhu Haibin, chief China economist at JPMorgan, said the latest data came in “notably” weaker than expected. “The slowdown was rather broad based,” he said.
The National Bureau of Statistics reported that fixed-asset investment in the first two months increased 17.9 percent from a year earlier. That compared with 19.6 percent for the whole of 2013 and was the lowest pace since 2002.Industrial production growth eased to a five-year low of 8.6 percent in the two months, down from 9.7 percent in December. Similarly, retail sales softened to 11.8 percent, their weakest performance since 2005, and foreign direct investment rose 4.1 percent in February, down from January’s jump of 16.11 percent.
Zhu said authorities should respond by “front-loading” fiscal spending in such areas as infrastructure and affordable housing.Yao Wei, an economist at Societe Generale, said China’s rapid slowdown poses a “critical” test to the nation’s new leaders. She suggested a cut in the reserve requirement ratio for banks to sustain economic momentum.“China’s first-quarter GDP growth falling below 7.5 percent is now pretty much certain, and something barely above 7 percent looks quite likely,” Yao said. “We have always viewed the new leaders as less pro-growth, but such a sharp slowdown is probably still more than what they can tolerate.”
Some blamed seasonal factors for the dismal set of figures, pointing the finger at the weeklong Spring Festival holiday, which varies according to the lunar calendar. This year the Lunar New Year began on the last day of January.
However, using two-month readings should ameliorate the annual distortion. The latest data showing multi-year lows suggest the reasons go beyond holiday periods and straight to the heart of reform policies aimed at putting growth on a more stable and sustainable footing.
No doubt, the slowdown in fixed-asset investment reflects some brakes on infrastructure and industrial spending as national leaders scrutinize mounting local government debt, factory overcapacity and public anger about persistent air pollution. All are key components of the economic policies of Premier Li Keqiang, which were dubbed “Likonomics” last year.Similarly, less investment in manufacturing led to softer growth of industrial production, while an anti-graft campaign curbing extravagant spending by public officials no doubt dealt a blow to retail sales.
Chang Jian, an economist at Barclays, said the much weaker-than-expected data highlight the “impossible” task of pushing for reform while maintaining stable growth in 2014.“We think this reflects the negative impact from ongoing reforms,” Chang said. “We have argued that reforms tend to slow growth in the near term, before the longer-term benefits start to be felt.”
While some analysts are eager to push for a loosening of austerity, others think the government is on the right track and needs to persevere.
Zhang Jun, an economics professor at Fudan University, said China should stick to its reform program, though he admits the word “reform” has been used so often in the past 30 years that it has lost some of its resonance.
“The current reform is different in meaning,” Zhang said. “It means the seeking of long-term drivers that can sustain the growth of China — an already huge economic entity, but only in terms of size.”
Reform has been a good propeller for China, Zhang said.
In the era of Zhu Rongji — the former premier who initiated the reform of state-owned enterprises in the 1980s — China successfully began turning its biggest corporations into contributors instead of burdens to the economy.
But reform can do harm if not properly managed, Zhang hastened to add. Some state-owned companies have grown so big that they now dominate the market. Reform is required to create a more open and competitive market, he said.
“The recent economic slowdown is part of the sacrifice of reforms,” Zhang said. “We must guard against possible structural risks and contain them at an early stage, but they should not become deterrents to reform.”
Global markets, too, play a role in China’s economy. Volatile overseas markets were blamed, in part, for the 18.1 percent slump in Chinese exports in February, but it also served as a strong force to drive ahead China’s economic restructuring.
Premier Li, addressing some of these issues during the recently concluded annual session of the National People’s Congress, said the nation is at a “critical juncture, where the path upward is particularly steep.”
The debate about the economy might be compared with the philosophy of medicine. In the West, medicine is targeted toward curing a specific disease. In traditional Chinese medicine, it is aimed at ensuring the future health of the whole body.
So what’s the best prescription for China’s current economic ills? Probably to keep long-term health as a target and endure the sneezes along the way.
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