Yao Shaohua, PhD Senior Economist shaohuayao@hangseng.com China Economic Growth Slows in 1Q 15 April 2015 Mainland China s economic growth continued to lose momentum in the first quarter, due largely to weak growth in industrial production and fixed asset investment. Official figures show that the world's second-biggest economy only grew by 7.0% in the first three months of 2015 compared with a year earlier. Despite weak first-quarter GDP figures, we believe that the Mainland s economy will remain on a steady growth path in the coming quarters as recent government efforts to boost growth start to have an effect. Domestically, investment growth is expected to rebound modestly on the back of an acceleration in infrastructure project approvals and modest recovery in the property sector. Steady income growth will help underpin consumer spending. Externally, with global conditions slowly improving, export growth is also expected to experience a moderate rebound. For these reasons, we continue to maintain our GDP growth forecast for the Mainland at 7.0% for 2015. The increasing downward pressure on economic growth calls for further monetary policy easing. With inflation remaining mild, we expect the People s Bank of China (PBOC) to cut the required reserve ratio (RRR) by 50 basis points three more times and interest rates once more before the end of the year. The Central Government will likely maintain a proactive fiscal policy to support economic growth through the acceleration of investment projects, tax reductions and local debt swap schemes and by encouraging private capital investment. We expect faster growth in fiscal expenditure than in fiscal revenue to result in another small fiscal deficit in 2015, with the headline ratio rising to about 2.3% of GDP in line with the official target.
Mainland s economic growth eased to 7.0% 1 in 1Q Mainland China s economic growth continued to lose momentum in the first quarter, due largely to weak growth in industrial production and fixed asset investment. Official figures show that the world's second-biggest economy only grew by 7.0% in the first three months of 2015 compared with a year earlier (Exhibit 1) the slowest growth in six years and down from 7.3% in the last quarter of 2014. This deceleration suggests that economic conditions remain challenging and that the economy may benefit from further policy easing. Exhibit 1: Mainland China s real GDP growth Source: National Statistical Bureau, Reuters EcoWin, Hang Seng Bank Domestic demand showed weakness, with both investment and retail sales growth declining in the first quarter. Fixed asset investment in urban areas advanced 13.5% after rising 14.7% in the previous quarter, and retail sales of consumer goods grew 10.6% after increasing 11.7% in the last quarter of 2014. On the production side, the growth of industrial output slowed significantly to 6.4% in the first quarter, compared with 7.6% in the fourth quarter of 2014. The Mainland s trade performance also deteriorated in the first quarter, with exports rising 4.7% and imports decreasing 17.6%, compared with 8.5% and -1.6% increase respectively in the fourth quarter of last year. With a significant slump in exports, the trade surplus narrowed to USD123.7 billion from USD149.5 billion during the same period. 1 All growth rates are year-on-year except specified otherwise 2
On the monetary front, the PBOC maintained loose credit conditions in the first quarter through monetary policy easing initiatives that included two interest rate cuts and one RRR reduction in the past four months. Total social financing, a comprehensive measure of all types of financing for the real economy, reached RMB4.61 trillion compared with RMB3.5 trillion in the fourth quarter of last year. Meanwhile, new renminbi loans accelerated to RMB3.68 trillion compared with RMB2.1 trillion in the previous quarter, while the growth of broad money supply (M2) decelerated to 11.6% from 12.2% due to declines in foreign exchange purchases, and inter-bank and off-balance-sheet activities. Economic outlook Despite weak first-quarter GDP figures, we believe that the Mainland s economy will remain on a steady growth path in the coming quarters as recent government efforts to boost growth start to have an effect. Strong infrastructure investment, a modest improvement in export growth and steady consumer spending will be the main drivers of this growth. Domestically, investment growth is expected to rebound modestly on the back of an acceleration in infrastructure project approvals and the modest recovery in the property sector due largely to the Belt and Road initiative and official easing measures. Steady income growth will help underpin consumer spending. Externally, with global conditions slowly improving, export growth is also expected to experience a modest rebound. For these reasons, we continue to maintain our GDP growth forecast for the Mainland at 7.0% for 2015. (Exhibit 2). Exhibit 2: Economic Forecast Year on Year Growth 2013 2014 2015F Real GDP growth, % 7.7 7.4 7.0 Fixed asset investment growth, % 19.6 15.7 14.0 Retail sales growth, % 13.1 12.0 12.0 RMB loans outstanding growth, % 14.1 13.6 12.2 Consumer price, % 2.6 2.0 2.0 Export growth, % 7.9 6.1 8.0 Spot CNY per US dollar 6.0543 6.2055 6.30 Source: CEIC, Hang Seng Bank 3
The increasing downward pressure on economic growth calls for further monetary policy easing. With inflation remaining mild, we expect the PBOC to cut the RRR by 50 basis points three more times and interest rates once more before the end of the year. The central bank will also likely continue to take measures such as standing lending facility (SLF), medium-term lending facility (MLF), and pledged supplementary lending (PSL) to help lower financial costs in a bid to support the real economy. According to this year s Government Work Report, the Central Government will maintain a proactive fiscal policy to support economic growth through the acceleration of investment projects, tax reductions and local debt swap schemes and by encouraging private capital investment. We expect faster growth in fiscal expenditure than in fiscal revenue to result in another small fiscal deficit in 2015, with the headline ratio rising to about 2.3% of GDP in line with the official target. 4
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