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Finance & Economy

Risks to China recovery seen as factory output underwhelms

China Factory WorkerChina’s factory output growth was surprisingly feeble in April and fixed-asset investment slowed, rekindling concerns that a nascent recovery is stalling and adding to pressure on policymakers to take action to stimulate the economy.

However, China’s already-easy monetary policy and rising home prices complicate the options available to Beijing’s new leadership, leading some analysts to say that any response could be limited to fiscal measures.

Annual industrial output grew 9.3 percent last month, according to data released by the National Bureau of Statistics on Monday, up from a seven-month low hit in March but still missing market expectations for a 9.5 percent expansion.

“Economic activity remains weak,” said Liang Youcai, a senior economist at the State Information Centre, a government think-tank.

“We now expect second-quarter gross domestic product growth of around 7.8-7.9 percent if there are no stimulus measures.”

Monday’s data dealt a further blow to investors’ hopes for a decisive revival of the world’s second-largest economy, following last month’s announcement that growth unexpectedly cooled in the first quarter of the year to 7.7 percent.

Growth in fixed-asset investment, an important driver of China’s economy, also disappointed in April. Investment rose 20.6 percent in the first four months from the same period a year ago, compared with expectations for a 21 percent rise.

Only retail sales met market expectations, growing 12.8 percent in April from a year ago.


For investors, the big question now is whether China’s economic rebound remains intact. This month’s evidence underlines Beijing’s growing policy dilemma, with economists saying that a recovery — if at all — is still fragile.

Data last week showed China’s consumer inflation, although muted, quickened more than expected in April, narrowing the scope for Beijing to further ease monetary policy if growth swoons.

Worse, surprisingly strong trade figures last week that were incongruous with subdued foreign demand suggested a substantial flow of hot money betting on a rising yuan is sneaking past China’s capital controls.

A flow of speculative cash into China is a headache for Beijing as it may fuel a rally in the country’s frothy property market, where prices are already at all-time highs.

“Monetary policy is now facing a dilemma,” said Jiang Chao, an analyst at Haitong Securities in Shanghai. “On the one hand, the central bank cannot cut interest rates for fears of reigniting property inflation. But on the other hand, China is seeing mounting hot money inflow pressures.”


April’s factory output data showed makers of transport equipment experienced one of the sharpest slowdowns last month compared with March. Crude oil output was another major decline.

China’s state-led infrastructure construction boom has been a major contributor of growth since the 2008/09 financial crisis as local governments pump-primed their economies.

Yet the sector has slowed in the past two years after profligate state spending accumulated a pile of government debt worth as much as 20 trillion yuan ($3.25 trillion), leading Beijing to order banks to reduce funding for the industry.

However, some analysts say Beijing could relax controls over financing of state infrastructure projects should economic growth slacken further.

A researcher at a state think-tank told Reuters last week that some local governments are already lining up financing options for their planned infrastructure projects in case they get a green-light from Beijing. He declined to be named due to the sensitivity of the matter.

Beijing has so far offered few clues about its policy plans, saying little beyond its stock phrase of keeping economic growth “stable”.

Within the government, state researchers say policymakers are debating over whether to focus on short-term demands or long-term benefits. There are arguments for Beijing to take action and stimulate growth now, or hold off and focus instead on restructuring the economy for the long haul.

China wants to promote consumption and cut its reliance on investment and exports, a transition that could be painful in the short-term as it constrains the government’s ability to unveil any new large-scale fiscal stimulus.

Ting Lu, an economist at Bank of America-Merrill Lynch, said he did not believe Beijing would succumb to the temptation to try to lift economic growth in the near term.

“Policymakers will resist introducing stimulus measures unless growth slides much further,” Lu said. “However, we believe that these new policymakers will try to avoid disrupting credit supply.”

Credit supply in China has risen rapidly in recent months as governments and companies sought financing outside the traditional banking sector amid Beijing’s clampdown on property and infrastructure investment.

The trend extended into April, when M2 money supply grew 16.1 percent, above forecasts for a 15.5 percent gain. China’s easy credit conditions, combined with its lacklustre real economy, has led some analysts to worry that money is being used for financial speculation rather than actual investment.

A Reuters poll last month showed analysts expect China’s economy to grow 8 percent this year, up from 7.8 percent in 2012, although many economists say the risks are for growth to disappoint.

Analysts have struggled to track the turns in China’s economy in the past year, often proving to be too upbeat.

Predictions that a mild economic recovery was under way this year proved overly optimistic after growth sputtered between January and March. Calls in 2012 for a growth rebound were also nine months too early, materialising only in the fourth quarter. ($1 = 6.1417 Chinese yuan)

Source: Reuters – “Risks to China recovery seen as factory output underwhelms”

About chankaiyee2

Author of the book "Tiananmen's Tremendous Achievements" about how with the help of Tiananmen Protests, talented scholars with moral integrity seized power in the Party and state and brought prosperity to China. The second edition of the book will be published within a few days to mark the 25th anniversary of Tiananmen Protests All the parts in the first edition remain in the second edition with a few changes due to information available later and better understanding. There are also some changes for improvements of style. The new parts are Chapters 12-19 on events in China after the first edition was published: The fierce power struggle for succession between reformists and conservatives; Xi Jinping winning all elders’ support during his mysterious disappearance for 2 weeks in early September, 2012; and Xi Jinping Cyclone. Chan Kai Yee's new book: SPACE ERA STRATEGY: The Way China Beats The US An eye-opening book that tells the truth how the US is losing to China. The US is losing as it adopts the outdated strategy of Air-Sea Battle while China adopts the space era strategy to pursue integrated space and air capabilities: It is losing due to its diplomacy that has given rise to Russian-Chinese alliance. US outdated strategy has enabled China to catch up and surpass the US in key weapons: Hypersonic weapons (HGV) that Pentagon regards as the weapon that will dominate the world in the future. Aerospaceplane in China’s development of space-air bomber that can engage enemy anywhere in the world within an hour and destroy an entire aircraft carrier battle group within minutes. Anti-satellite (ASAT) weapons, anti-ASAT weapons, stealth aircrafts, drones, AEW&C, etc. The book gives detailed descriptions of China’s weapon development based on information mainly from Chinese sources that the author monitors closely. U.S. Must Not Be Beaten by China! China is not a democracy. Its political system cannot prevent the emergence of a despotic leader or stop such a leader when he begins to bring disasters to people. A few decades ago, Mao Zedong, the worst tyrant in world history did emerge and bring disasters to Chinese people. He wanted to fight a nuclear war to replace capitalism with communism but could not bring nuclear holocaust to world people as China was too weak and poor at that time. If a despot like Mao Zedong emerges when China has surpassed the US in military strength, world people will suffer the misery experienced by Chinese people in Mao era. China surpassing the US in GDP is not something to worry about as China has the heavy burden to satisfy its huge population, but China surpassing the US in military strength will be world people’s greatest concern if China remains an autocracy. US people are of much better quality than Chinese people. What they lack is a wise leader to adopt the correct strategy and diplomacy and the creative ways to use its resources in developing its military capabilities. I hope that with the emergence of a great leader, the US can put an end to its decline and remain number one in the world. China, US, space era strategy, air-sea battle, space-air bomber, arms race, weapon development, chan kai yee

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