China Data Show Economy Cooling

Photographer: Tomohiro Ohsumi/Bloomberg

Customers browse clothing inside a store in Wuhan, China. Close

Customers browse clothing inside a store in Wuhan, China.

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Photographer: Tomohiro Ohsumi/Bloomberg

Customers browse clothing inside a store in Wuhan, China.

China’s industrial-output, investment and retail-sales growth cooled more than estimated in January and February, signaling an economic slowdown that makes the government’s 2014 expansion target harder to reach.

Factory production rose 8.6 percent in the two-month period from a year earlier, the National Bureau of Statistics said today in Beijing, the weakest start to a year since 2009. Retail sales advanced 11.8 percent, the slowest pace for the period since 2004, while the 17.9 percent increase in fixed-asset investment was a 13-year low for the months.

Hong Kong stocks fell and copper extended declines following the data, which came two hours after Premier Li Keqiang indicated he was confident the nation would meet what he said was a flexible growth target of “about” 7.5 percent. The slowdown may test the Communist Party’s commitment to give market forces a bigger role in the world’s second-largest economy while confronting overcapacity, debt and pollution.

“This is a very fast deceleration,” said Yao Wei, China economist at Societe Generale SA in Hong Kong, ranked as the most accurate forecaster of China’s gross domestic product by Bloomberg. “This is really beyond the tolerance of the Chinese government. As a result, I think they will cut the required reserve ratio quite soon or do some easing.”

Such a reduction could happen “within a few days” if the government wants to achieve 7.5 percent expansion, Yao said.

Stock Markets

Hong Kong’s Hang Seng Index (SHCOMP) fell 0.7 percent at 3:16 p.m. local time after rising as much as 0.6 percent earlier in the day. The Shanghai Composite Index, which pared gains after the reports, closed 1.1 percent higher.

China combines data for industrial output, retail sales and fixed-asset investment for January and February, citing distortions from the weeklong Lunar New Year holiday, whose timing differs each year.

Factory-production growth compared with the 9.5 percent median projection of analysts surveyed by Bloomberg News and a 9.7 percent advance in December. Retail sales were projected to rise 13.5 percent. They increased 13.6 percent in December.

The median estimate for fixed-asset investment growth was 19.4 percent, after a 2013 full-year pace of 19.6 percent and 21.2 percent in the first two months of last year.

‘Dramatic Slowdown’

“The fairly dramatic slowdown is unusual in Chinese economic history of the last decade” and today’s figures are “shockingly weak,” Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong, said in a note. “It points to a major deceleration of momentum in the beginning of 2014.”

Previously released data for February showed exports unexpectedly plunged by the most since the global financial crisis, producer-price deflation deepened and credit growth trailed estimates.

Data today from the statistics bureau also showed that the value of homes sold fell 5 percent from the same two months a year earlier. That compared with an almost doubling in sales in the first two months of 2013.

China Lodging Group Ltd. (HTHT), a Shanghai-based hotel-chain operator, said its occupancy rate dropped to 90 percent in the fourth quarter from 92.1 percent a year earlier, mainly due to a “soft and still recovering” economy, according to a March 11 statement.

Flexible Target

“Since we say the GDP growth target is about 7.5 percent, ‘about’ means it has a certain degree of flexibility,” Li said at a press briefing in Beijing today after the end of the annual meeting of the National People’s Congress, referring to gross domestic product. “A bit higher or a bit lower, we have a level of tolerance here.”

The government cares more about jobs and ensuring people’s livelihoods rather than the pace of growth, Li said.

Credit Agricole’s Kowalczyk said Li’s highlighting of the “soft nature” of the target “will give him some flexibility to absorb the current slowdown without automatically reaching for stimulus measures as he would have in the past.”

China was able to realize last year’s economic targets without using short-term stimulus measures, Li said today. “Why will we be unable to do so this year?” he asked.

Li said earlier this month that pollution is a major concern, pledging to “declare war” on smog and close coal-fired furnaces. The country will reduce emissions and impose a ceiling on energy consumption, Li said in his work report to the NPC.

Weaker Yuan

The yuan has weakened about 1.4 percent against the dollar this year, while the benchmark money-market rate this week touched the lowest level since March 2013. Yuan trading in Hong Kong’s offshore market trimmed gains to 0.07 percent following today’s data, after rising as much as 0.23 percent earlier.

China’s seven-day repurchase rate rose today, halting a five-day decline, after the central bank stepped up draining of excess cash from the financial system. The rate climbed 28.5 basis points to 2.51 percent as of 2:49 p.m. local time.

“Premier Li will have to allow further policy easing,” said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong, estimating the data suggest growth about 7 percent. “It is perhaps the time” for the central bank to contemplate cutting interest rates or banks’ reserve requirements, since it’s unclear if China can sustain easier conditions in money markets and a weakening of the exchange rate, Liu said.

To contact the reporter on this story: Rachel Butt in Hong Kong at rbutt4@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net; Paul Panckhurst at ppanckhurst@bloomberg.net Nerys Avery, Scott Lanman

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