China’s Q2 growth slows to 7.5%, likely to spur reform effort

Wednesday, 17 July 2013 00:00 - - {{hitsCtrl.values.hits}}

Reuters: China’s annual GDP growth slowed to 7.5% in April to June – the ninth quarter in the last 10 that expansion has weakened – putting pressure on Beijing to quicken reforms rather than slow them to take up the economic slack. Data showed the world’s second-biggest economy slowed down in line with the median forecast in a Reuters poll after growth of 7.7% in the January-to-March period. Asian stocks rose on relief growth was not lower after a surprise fall in exports in June. A spokesman for the National Bureau of Statistics (NBS) said the economy could still meet the full-year growth target of 7.5%, while the Central Bank governor said the Government would increase incentives to support small businesses to try to stabilise growth. But analysts said the slowdown would encourage the Government to push harder on reforms. The alternative – pumping more cash into the economy through monetary easing – raises the risk of exacerbating already hot housing and credit markets. “The slowdown will force the Government to push reforms to help unleash new growth engines,” said Beijing Agricultural Bank of China chief economist Xiang Songzuo.

The latest year-on-year growth rate was the second-lowest since the global financial crisis after 7.4% in the third quarter of last year. The NBS spokesman, Sheng Laiyun, said the slowdown was partly the result of Beijing’s efforts to reform the economy, a program aimed at reducing its reliance on exports and investment to encourage more domestic consumption. Investment was the biggest growth driver in the first half, contributing 4.1% points to the 7.6% rate, while consumption contributed 3.4% points and net exports made up 0.1% point, the bureau said. Other figures released on Monday showed industrial output in June rose less than expected from a year earlier while annual growth in fixed-asset investment growth in the first half lost some steam, with consumption bucking the trend. Beijing is still dealing with the lingering hangover of a 4 trillion yuan stimulus package implemented in 2008-2009, which resulted in piles of local Government debt. Analysts believe Beijing will step in only if growth slips below 7% from a year earlier in any quarter. If needed, Beijing has ample room to expand fiscal spending, by tapping into about 3 trillion yuan in savings, or expand its fiscal deficit, Bank of American/Merrill Lynch economist Ting Lu, said before the GDP figures were released. The main worry for China’s leaders is if the economic slowdown leads to high unemployment that could spark social unrest. So far Government officials say employment is stable. Premier Li Keqiang has been prominent in pushing for economic reform over fast-line growth, suggesting the Government is in no rush to offer fresh stimulus to revive an economy in a protracted slowdown. High on Beijing’s reform agenda is to liberalise interest rates, which proponents say would help resolve deep-seated financial distortions, including a sprawling non-bank lending industry. Banks will be encouraged to conduct financial innovations, such as credit securitisation, to support the real economy. “The Government is obviously aware that such a moderate slowdown is conducive to economic restructuring. The government is still calmly carrying out restructuring and speeding up reforms despite the slowdown. This decision is correct from a long-term perspective,” said Sheng.