China's Q1 Moderate Economy Slowdown Within Stable, Controllable Range

BEIJING, April 9 (Xinhuanet) – Amid complex and grim economic environment at home and abroad, preliminary indicators showed China's economic growth in the first quarter has continued the momentum of moderate slowdown.

However, analysts said the margin of slowdown is still within stable and controllable range and expected new policies to ensure sound development when China tackles the arduous tasks of growth model transformation and economic structure adjusting.

Moderate economic slowdown

According to data published by the National Bureau of Statistics, the troika driving the economic growth, namely investment, consumption and export, all witnessed drops in the first quarter.

China's urban fixed asset investment climbed 21.5 percent from a year earlier, down 2.3 percentage points year-on-year, retail sales rose 14.7 percent year on year to 3.37 trillion yuan in the first two months, sharply lower than the 18.1 percent registered in December, while export increased 6.9 percent in the same period, down 6.5 percentage points from last December.

Premier Wen Jiabao said on Tuesday that despite the decline of a few major economic indicators, China's economy as a whole continues to grow as the government anticipated in its exercise of macro-controls.

“Despite the falls, major economic indicators are still at reasonable levels, and confidence should be maintained on the country's economic work,” Wen said during a three-day inspection trip to the southeastern Fujian Province and southern Guangxi Zhuang Autonomous Region.

China's GDP growth may have slowed to about 8.4 percent year-on-year in the first quarter, still boding well for the economy in 2012, said Zhang Xiaoqiang, deputy director of the National Development and Reform Commission.

The National Bureau of Statistics is due to officially announce the quarter's CPI figure on April 9 and GDP four days later.

Affected by European and U.S. debt crisis and self-imposed macro economic controls, China’s economic growth in 2011 fell consecutively from 9.7 percent in the first quarter to 8.9 percent in the fourth quarter.

China has cut its annual growth target to 7.5 percent this year, an eight-year low and a pace China hopes will give it room to push through structural reforms to achieve "higher-level, higher-quality development over a longer period of time."

"Stable growth has been set as the tone for 2012 by the government in the context of the uncertainties and challenges of the world economy," Zhang said at a lunch session of the Boao Forum for Asia 2012 in the southern Chinese island of Hainan early April.

The first quarter, as the start of China’s economic development this year, is still on the momentum of moderate slowdown and within people’s expectation, said Zhang Liqun, a research fellow at the Development Research Center of the State Council. Zhang added that the scale of the growth slowdown is controllable.

The view of Liu Yuanchun from Renmin University sounds more optimistic as he cited the positive change in the first quarter of non-manufacturing sector's Purchasing Managers Index (PMI), a key economic indicator, which jumped to an 11-month high of 53.1 percent in March from January’s 50.5 percent. A PMI reading above 50 percent indicates expansion from the previous month, while below indicates contraction.

Liu further cited favorable conditions globally as U.S. economic recovery is better than expected and Europe seems to have emerged from its worst times of debt crisis.

Ting Lu, China economist at Bank of America/Merrill Lynch in Hong Kong, expects China's annual GDP growth for the first quarter to be 8.3-8.4 percent, easing from 8.9 percent the previous quarter.

"I believe growth will hit the bottom in the first quarter, but a sharp rebound in the following quarters is unlikely," Lu said on the sidelines of the 2012 Boao Forum.

The weaker growth was caused by the impact of Europe's debt crisis, which hurt China's exports, and the lag effect of the central bank's policy tightening, he added.

There is no "hard landing" to worry about, unless growth drops to 7 percent for two consecutive quarters, said Zhang Yuyan, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences.

According to a report issued Saturday by the Bank of China, China's economic growth is expected to ease to 8.2 percent in the first quarter.

The consumer price index, a main gauge of inflation, is expected to rise by 3.6 percent and 3.0 percent year-on-year in the first and second quarters, respectively, the report said.

The report said sluggish growth for China's trading partners in the European Union, the United States and Japan, as well as excessive industrial capacity and shrinking domestic demand, will be major challenges for the economy this year.

Macro control takes effect

With a slower pace of growth in China’s economy, the consumer prices in the first quarter also continued the trend of falling, a sign that the inflation control measures have taken effect. In the meanwhile, the pre-adjustment and fine-tuning of macro-control policies unveiled since the end of last year have also begun to show effects.

The once skyrocketing consumer price index has seen considerable drops as it declined to 3.2 percent in February from January’s 4.5 percent.

Experts believed that despite rebound of some food prices and rise of fuel prices in March, the consumer prices will remain in decline on the general as the result of contracting aggregate demands.

Liu Yuanchun noted that China took stabilizing prices as the top priority of macro economic control last year, thus unveiling a series of effective anti-inflation measures.

“Therefore, the inflation pressure will ease this year as the result of the lag effects of those measures.” Liu added.

Different from Liu’s optimistic view, Zhang Liqun warned against a rebounding inflation pressure since the outstanding broad money supply (M2), which covers cash in circulation and all deposits, rose 13 percent year on year to 86.72 trillion yuan by the end of February. Moreover, Zhang further cautioned that imported inflation, volatile global oil prices and uncertain U.S. monetary policies all weighed on the concerns,

The People's Bank of China, the central bank, keeps prudent monetary policy this year compared with its tight strategy for most of last year. China’s new loans in the first quarter are expected to overpass that of last year.

It said in its first-quarter meeting that it would use various kinds of monetary policy tools to guide supplies of money and credit to grow steadily and to maintain social financing on a reasonable scale, sending policy signal that finance will support a stable and relatively fast economic growth.

China International Capital Corporation Limited said in its latest report that the fiscal revenues in the first two months fell sharply from that in the same period of last year, as the result of structural tax reductions. The national budget increased by a large margin in the fixed asset investment in the first two months, showing that proactive fiscal policy began to take effect in the stabilizing economic growth.

Arduous task of stabilizing growth, adjusting structure

Premier Wen called for close attention to new conditions and problems and the implementation of flexible and prudent macro-policies with timely and appropriate anticipatory adjustments and fine-tuning to ensure a sound and rapid economic development.

Though the pace of the first-quarter slowdown is within control, but given the severe internal and external economic environment, the foremost task right now is to prevent the economy from further slipping.

China should put priority on stabilizing economic growth and closely watch the situation change, at the same time strengthen the coordination between industrial policies, fiscal and credit policies, so as to resolve various risks and guard against fast decline of growth rate.

Regarding monetary policy, due to being restricted by uncertainties of imported inflation and current banking system, the credit supply is still hard to meet the demands of small and medium-sized enterprises. China should on one hand fine tune its monetary policy to boost the financing support for those enterprises and on the other hand push forward the reform in banking sector and promote development of small banks. These are difficult tasks China should deal with.

Only last week, China approved financial reforms for Wenzhou -- known as the country's cradle of private enterprise -- to encourage private investment in local banks.

Under the banking reform being tested in Wenzhou, private investors will be encouraged to buy into local banks and to set up financial institutions such as loan companies and rural community banks, the State Council has said.

China hopes it will enable hungry small businesses -- vital to employment -- to access finance more easily and cheaply.

In terms of fiscal policy, greater efforts should be made in structural tax reduction. Currently, large-scale fiscal spending is neither conducive to stabilizing commodity prices nor to adjusting economic structure. Whereas, structural tax reduction will encourage not only personal consumption but also enterprises’ investment, especially beneficial to small and medium firms, thus getting the best of the two worlds – stabilizing growth and adjusting structure. However, to press ahead the structural tax reduction, it is necessary to reform the current financial and taxation systems.

The government has firm support for small and medium-sized enterprises and it is mulling over further structural tax reductions to back up their development, said Premier Wen when visiting local private enterprises in southern China.

The government should properly handle the relationship among maintaining a sound and rapid economic development, adjusting economic structures and managing inflationary expectations, said Wen.

"The fundamentals of the Chinese economy remain good and the momentum of economic growth has not changed. We will be able to maintain steady and relatively fast development in the long term," Vice Premier Li Keqiang said in a speech at the opening ceremony of the Boao ForumC.

"Expanding domestic consumption is our top priority in adjusting the economic structure," said Li.

Macro policy easing expected

As the pace of economic growth slowed down and inflation pressure eased, analysts hold that China will pre-adjust and fine tune its macro economic policy.

They also expect the central bank to continue cutting the amount of cash that commercial lenders must hold as reserves to crank up credit expansion, but the chances of a near-term cut in benchmark interest rates look slim.

Xu Gao, chief analyst from Everbright Bank, said future macro policy should put more emphasis on infrastructure investment and he expected the further loosening of related policies in the second quarter, which will help drive the economic growth to bottom out.

“As inflation pressures continue to ease, weaker export growth is likely to prompt further easing measures,” said Hongbin Qu, Chief Economist and Co-Head of Asian of Economic Research at HSBC said.

“We still expect at least another 100 basis point reserve requirement ration cuts in the first half and additional tax breaks and fiscal spending. Once the easing measures filter through, growth is likely to start bottoming out in the second quarter and rebound modestly in the second half, “ Qu added.

Echoing Qu’s view, Ding Anhua, chief economist from China Merchants Securities Co., said given the economy and inflation are both down, the macro policy will further ease and the central bank is likely to cut the reserve requirement ratio in the first half of this year.