China's growth jolts market
The gross domestic product of the world's second-largest economy's grew 7.7 per cent in the first three months of the year - a weaker than expected result that lowered the Australian dollar and most mining stocks on Monday.
GDP had rebounded to 7.9 per cent growth in the final quarter of last year, marking the end of a two-year slowdown, and analysts had expected China to have an even stronger start to 2013. But sluggish industrial production and retail sales instead revealed an unexpected softness in its economy.
However, China's first-quarter economic data is notorious for throwing up red herrings due to the disruption of the Spring Festival (or Chinese New Year) holiday period.
"Overall, the Chinese economy had a smooth start in 2013," Premier Li Keqiang said a day before the data was released. "But many uncertainties, at home and abroad, still persist and make the overall situation quite complicated."
President Xi Jinping said while China's economy would continue to grow strongly, he warned the days of the "high-speed growth" of the past three decades were over. Beijing would focus on more sustainable economic expansion, he said.
China has continued to spend big on a network of airports, high-speed rail and highways, but has taken strong action as part of a three-year plan to prevent its property sector from overheating.
The softer retail sales have also been seen partly as a result of Mr Xi's public warnings against government officials overspending on luxury goods, amid rising anger at perceived rampant corruption.
While the data caught almost all analysts by surprise, most said it was no cause for concern yet.
"I don't think this is a turning point for slower growth. I think the recovery is probably delayed but ... is still coming," UBS economist Wang Tao said.
But Fitch Ratings expressed concerns last week about the long-term consequences for China's financial stability over the country's huge build-up in debt, particularly borrowing by local governments.
And economists at IHS Global said there was "plenty more downside risk out there than upside risk".
"We have lost confidence in a robust recovery," economists Ren Xianfang and Alistair Thornton said, adding that a repeat of last year's economic stimulus would prove disastrous in the long run.
"Another year of propped-up growth via state spending and a credit deluge would, we fear, push China dangerously close to proving Wen Jiabao correct - that the current economic model is 'unsustainable'."
Frequently Asked Questions about this Article…
China's economy grew 7.7% in the first three months of the year, weaker than many analysts expected after a 7.9% rebound in the previous quarter. The softer-than-expected GDP, along with sluggish industrial production and retail sales, surprised markets and knocked the Australian dollar and many mining stocks lower.
China is a major buyer of commodities, so slower Chinese growth tends to reduce demand for raw materials. After the weaker Q1 data the article reports, the Australian dollar fell and most mining stocks dropped because investors worry about lower commodity demand from China.
Q1 Chinese data can be distorted by the Spring Festival (Chinese New Year) holiday, which disrupts production and spending patterns. The article notes that analysts often treat early-year numbers cautiously for that reason, so a single quarter's softness may not signal a lasting trend.
Premier Li Keqiang said the economy had a smooth start but warned of many uncertainties, while President Xi Jinping said the era of 'high-speed growth' is over and that Beijing will focus on more sustainable expansion. For investors, that signals a shift from rapid growth to steadier, policy-driven priorities that could change demand patterns and policy responses.
China continues heavy spending on airports, high-speed rail and highways, but has a three-year plan to prevent the property sector from overheating. That mix means infrastructure supports growth while tighter property rules could cool a key source of demand—both of which are important risks for investors to monitor.
Credit ratings firm Fitch warned about long-term financial-stability consequences from China’s large build-up of debt, particularly borrowing by local governments. The article suggests this is a genuine risk that could affect growth and markets over time, so investors should pay attention to signs of stress in China’s credit and local government finances.
Views are mixed: many analysts were surprised but not alarmed. UBS economist Wang Tao said the recovery may be delayed but is still coming. However, IHS Global warned there is more downside risk than upside, and some economists cautioned that another year of stimulus-led growth would be unsustainable.
Investors should monitor industrial production, retail sales, policy moves on the property sector, local government borrowing and any new stimulus measures. Also keep in mind seasonal distortions like the Spring Festival when interpreting early-year data.
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