China's weak GDP raises concerns
China's gross domestic product grew 7.7 per cent in the first three months of the year - a weaker-than-expected result that led to a fall in 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 the economy to have an even stronger start to this year.
But sluggish industrial production and retail sales revealed unexpected softness in the economy, though China's first-quarter 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," said Premier Li Keqiang a day before the data was released. "But many uncertainties, both at home and abroad, still persist and make the overall situation quite complicated."
In a speech this month, President Xi Jinping said while China's economy would continue to grow strongly, the days of "high-speed growth" seen in the past three decades were over. Instead, he said, Beijing would focus on more sustainable economic expansion.
China has continued to spend heavily 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 has also been seen partly as a result of Mr Xi's public warnings against government officials overspending on luxury goods, amid rising anger over perceived corruption.
While the data caught analysts by surprise, most said it was not yet a cause for concern.
"I don't think this is a turning point for slower growth," UBS economist Wang Tao said. "The recovery is probably delayed but I think the recovery is still coming."
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.
Economists at IHS Global Insight said "there is plenty more downside risk out there than upside risk".
"We have lost confidence in a robust recovery," Ren Xianfang and Alistair Thornton said in a note, 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 GDP grew 7.7% in the first quarter, a weaker‑than‑expected result after a 7.9% rebound in the prior quarter. The softer outcome surprised markets because analysts had expected a stronger start to the year and because industrial production and retail sales also looked sluggish.
The softer GDP figure prompted a fall in the Australian dollar and a drop in most mining stocks on the day the data was released, reflecting investor sensitivity to China's slower‑than‑expected growth given its importance for commodity demand.
Views are mixed. Some economists — including UBS’s Wang Tao — say the result looks like a delayed recovery rather than a turning point. However, other forecasters such as IHS Global Insight and ratings agency Fitch flag downside risks and longer‑term concerns, especially linked to debt buildup and local‑government borrowing.
Top leaders have signalled a shift: President Xi has said China will pursue more sustainable rather than ‘high‑speed’ growth, while Beijing continues heavy infrastructure spending and is acting to cool the property sector. Those policy moves — and public warnings against official overspending — can dampen luxury retail demand and shape investor expectations about the pace and quality of growth.
Fitch warned that the large build‑up in borrowing, particularly by local governments, raises long‑term financial‑stability risks. For investors this means watching credit growth, local‑government finance trends and any signs that debt problems could spill over into slower growth or financial stress.
First‑quarter Chinese data can be distorted by the Spring Festival (Chinese New Year) holiday, which disrupts production and consumption patterns. The article notes Q1 figures often throw up ‘red herrings’, so investors should treat single‑quarter surprises with caution and look at broader trends.
Economists in the article warned that repeating last year’s large‑scale stimulus and a fresh credit deluge could be damaging in the long run. They say continued propped‑up growth via state spending risks pushing China toward an unsustainable economic model with mounting debt vulnerabilities.
Investors should monitor sequential releases of industrial production and retail sales, signs of government support or new stimulus, property‑sector policy moves, local‑government borrowing and official commentary from leaders (for example on growth targets and spending). These indicators will help assess whether the recovery is picking up or downside risks are growing.
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