China economy shows unexpected signs of weakness

Reuters: China’s economy stuttered unexpectedly in April with lower-than-expected output data, softening retail sales and easing prices suggesting economic headwinds might be stiffer than thought, requiring more robust policy responses to counter them.

Industrial output expanded at its slowest annual pace in April in nearly three years, while fixed asset investment growth dipped to its lowest in almost a decade.

The weak growth in fixed asset investment signalled that the impact of a prolonged credit crunch in China’s real estate sector, and of flagging demand from export markets, was more severe than first thought.

In fact, new loans in April were well below what most market observers had expected, helping to explain continued tight conditions for businesses and developers despite the gentle easing espoused by Beijing.

“The data suggests further deceleration of the economy at the start of Q2, with all segments of private demand weak,” Dariusz Kowalczyk, economist at Credit Agricole-CIB in Hong Kong, said.

Beijing has been “fine-tuning” monetary and fiscal policy since the autumn of 2011 when a softening of demand from the European Union - China’s biggest export market - and the impact of domestic policy tightening left firms struggling, but as the economy endeavours to regain upward momentum analysts say the time for more robust action may be drawing near.

Industrial production rose by 9.3 percent in April, the lowest level since May 2009, while retail sales growth slowed to 14.1 percent, the weakest in 14 months.

Fixed asset investment rose by 20.2 percent in the first four months of the year, the slowest level since December 2002.

Property investment growth slowed to 9.2 percent, the lowest level since November 2009, according to Reuters calculations. New property investment in the first four months slowed to 18.7 percent growth, from 23.5 percent growth in the first quarter.

Power output growth, considered a particularly accurate measure of the real economy, slowed to less than 1 percent.

China’s implied oil demand was uncharacteristically flat and may even have turned negative in April. That helped weigh on U.S. crude futures, which plunged below $100 a barrel in early May after creeping up to last year’s higher levels in April.

China’s two-year long battle with inflation and a property bubble are the after-effects of the stimulus programme implemented to maintain growth in the wake of the 2008-09 global financial crisis.

Easing inflation potentially gives Beijing more scope to loosen policy to help the economy rebound from a first-quarter slowdown in growth.

Annual consumer inflation moderated to 3.4 percent in April from 3.6 percent in March, while food prices - which are of most concern for China’s people and policymakers - rose by 7 percent, compared with 7.5 percent in March.

Slowing growth has weighed on demand from China’s manufacturing sector, which struggles with overcapacity in many sectors. April’s producer price index (PPI) dropped by 0.7 percent after a 0.3 percent drop in March, overshooting expectations.

Retreating inflation has led investors to speculate that China may cut further the amount of cash it requires banks to hold as reserves to encourage them to lend more to cash-strapped firms.

China has cut the required reserve ratio by 100 basis points from a record high of 21.5 percent in two steps, the last a 50 bp cut in February. The market consensus is for 150 bps of more RRR cuts this year, according to the benchmark Reuters poll.

Annual export growth of just 4.9 percent in April, below a forecast of 8.5 percent, highlighted the risks to China’s factory-focused economy of a fresh downturn in demand.

Continued softness in domestic demand is exacerbated by the impact of financial turmoil in Europe, a major export market.