China Leaders Tested on Growth Resolve After Slowdown
China’s new leaders face a test of their resolve to forgo short-term stimulus for slower, more-sustainable growth after May trade, inflation and lending data trailed estimates, signaling weaker global and domestic demand.
Industrial production rose a less-than-forecast 9.2 percent from a year earlier and factory-gate prices fell for a 15th month, National Bureau of Statistics data showed yesterday in Beijing. Export gains were at a 10-month low and imports dropped after a crackdown on fake trade invoices while fixed-asset investment growth moderated and new yuan loans declined.
The data add pressure on President Xi Jinping and Premier Li Keqiang to shore up growth less than three months into their tenure, after first-quarter expansion unexpectedly slowed. While the figures boost the case for easing monetary policy or approving more spending, the government’s room is limited by rising home prices, financial risks and overcapacity.
“The May data will force China’s leadership and the central bank to rethink growth and inflation -- it seems they were too optimistic about growth and too concerned about inflation,” said Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong. “It’s a test for China’s leadership to see whether they are determined to reform.”
In neighboring Japan where the central bank unleashed unprecedented easing in April, the economy grew more than the government initially estimated in the first quarter, helping Prime Minister Shinzo Abe to sustain confidence in his campaign to defeat deflation. Bank of Japan policy makers are meeting today and tomorrow.
China’s statistics increase the odds of an interest-rate cut, and the government can make fiscal policy more “proactive,” said Shen, who previously worked at the European Central Bank.
Copper slumped for a third day and the Australian and New Zealand dollars declined. In Hong Kong, the Hang Seng China Enterprises Index fell 0.1 percent as of the midday break in trading. China’s financial markets are closed today through June 12 for the Dragon Boat Festival holiday.
Li has pledged to reduce the government’s role in the economy and open it up more to private investment. He told provincial leaders June 8 that while growth is still within a reasonable range and employment is stable, “complicated factors” are ahead and must be closely monitored, the official Xinhua News Agency reported.
Analysts are paring growth estimates. A Bloomberg News survey last month showed a median projection of 7.8 percent for the year, down from an 8 percent pace forecast in April. The survey, conducted May 16 to 21, showed one of 27 economists projected a lending-rate reduction by the end of the third quarter.
Australia & New Zealand Banking Group Ltd. (ANZ) yesterday reduced its 2013 growth forecast to 7.6 percent from 7.8 percent and said a quarter percentage-point cut in interest rates may be imminent. Haitong International Securities Co. sees two or three cuts in banks’ reserve requirements, one rate cut and approval of more infrastructure projects in the next several months.
“The risks of policy easing will rise as we get closer to the important Communist Party meeting in October” as political pressure builds to deliver “good economic numbers,” Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, said yesterday. He was referring to a gathering that may decide on reforms ranging from the financial system to income distribution.
Lu Ting, head of Greater China economics at Bank of America Corp. in Hong Kong, said he expects “no new stimulus measures” and no interest-rate cuts, though authorities may speed up allocation of project funding.
May industrial production compared with the median estimate for a 9.4 percent increase, with growth the weakest for a January-May period since 2009. Fixed-asset investment excluding rural areas rose 20.4 percent in the first five months from a year earlier, down from a 20.6 percent pace in January-April, statistics bureau data showed. May’s retail-sales growth of 12.9 percent matched the median projection of analysts.
Passenger-vehicle sales increased at a slower pace for the third straight month, data from the state-backed China Association of Automobile Manufacturers showed yesterday.
May exports rose 1 percent from a year earlier, down from 14.7 percent in April, while imports dropped 0.3 percent, the customs administration said. The median estimates of analysts were for 7.4 percent export growth and 6.6 percent import gains.
The “collapse” in trade adds pressure on the central bank to guide the yuan’s exchange rate lower, Barclays Plc said in a June 8 report. The yuan has risen 1.6 percent this year against the U.S. dollar and about 15 percent against the yen, the most among Asian currencies tracked by Bloomberg.
New local-currency lending of 667.4 billion yuan ($109 billion) trailed the median estimate of 34 economists and was down from 793.2 billion yuan a year earlier, People’s Bank of China data showed. Aggregate financing of 1.19 trillion yuan compared with 1.14 trillion yuan in May 2012, while M2 money supply grew 15.8 percent from a year earlier.
The rate China’s lenders charge one another on overnight loans jumped the most in almost two years on June 7 as shrinking capital inflows led to a cash squeeze before the holiday. The lack of a swift response reflects the central bank’s hesitation in adding liquidity amid criticism for providing excess credit that wasn’t used to support the economy, Bank of America’s Lu said.
Slower inflation may give authorities more room to bolster growth. The consumer price index rose 2.1 percent in May from a year earlier, statistics bureau data showed, below all 39 economists’ estimates and the government’s 3.5 percent target.
The producer price index fell by a more-than-estimated 2.9 percent, the biggest drop since September. That makes inflation-adjusted borrowing costs “too high for most businesses,” Mizuho’s Shen said.
Some business leaders still see promise. PepsiCo Inc. (PEP) Chief Executive Officer Indra Nooyi said June 6 that China is a “phenomenal market” for beverages and snacks and that the company is making money in the country. “We are very bullish on China,” Nooyi said.
Elsewhere in the Asia-Pacific region today, reports showed New Zealand’s first-quarter manufacturing volumes fell 0.6 percent from the previous three months, while Japan’s current-account surplus for April was 750 billion yen ($7.6 billion), more than double the 350 billion-yen median estimate of analysts.
Japan’s gross domestic product expanded an annualized 4.1 percent, compared with a preliminary calculation of 3.5 percent, the Cabinet Office said in Tokyo today. In Europe, industrial production data are due for France, Sweden, Italy and Greece.
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