China's economy slows to 6.1 percent in Q1

By Dong Zhixin (chinadaily.com.cn)
Updated: 2009-04-16 13:39

China’s economy slowed to the lowest pace in ten years, as the country took more hits from a global slowdown, official figures showed on Thursday, but several key indicators are pointing to signs of recovery.

The Gross Domestic Product (GDP) expanded 6.1 percent year-on-year in the first quarter, the seventh straight quarter of deceleration, Li Xiaochao, spokesman for the National Bureau of Statistics (NBS) told a press conference in Beijing.

The reading may look low, especially for the Chinese who has got used to double-digit growth, but is much better than expected, analysts believed. "We were expecting a five-percent growth," Galaxy Securities chief economist Zuo Xiaolei told chinadaily.com.cn.

The economy has taken on several "positive changes", and performed "better than expected," since the government announced a series of measures to boost the economy, including a US$586 billion stimulus package and plans to revitalize 10 key industries, Li Xiaochao told the press conference, repeating Premier Wen Jiabao’s words.

Fixed assets investment in the country jumped 28.8 percent year-on-year in the first quarter, 4.2 percentage points higher than the growth in the same period last year, as the country pumped tens of billions into the construction of highways, airports, ports, and electricity grids.

Chinese consumers proved another bright spot. Unlike their western counterpart who cut back spending on almost everything, they continue their buying in spite of lingering uncertainties.

Real retail sales, strapping out of inflation, grew 15.9 percent from a year earlier in the first three months, compared with a growth of 12.3 percent in the same period last year.

The latest retail reading might be music to the government which is counting on the consumers to help fill the void left by falling external demand and has taken a series of measures, including a 850-billion-yuan health care reform plan, to spur them to dig deeper into their pockets.

What may also inspire the Chinese urge to consume are falling prices. The Consumer Price Index (CPI), which measures a typical basket of goods bought by consumers, fell 0.6 percent from a year earlier, after dropping 1.6 percent in the previous month.

The Producer Price Index, which measures factory gate price levels, declined 4.6 percent, compared with a fall of 4.5 percent in February. Lower price levels are providing more leeway for the central bank to cut interest rates if necessary to boost growth.

Positive signs

"The 6.1 percent GDP growth in the first quarter should be the lowest level in this round of adjustment," said Lu Zhengwei of the Industrial Bank, adding that the economy will see an obvious rebound in the second quarter.

But Qi Jingmei, a researcher with the State Information Center (SIC), a think-tank under the National Development and Research Commission, refused to call a bottom.

However, "the economy is showing signs of stabilizing," she said, pointing to jumps in bank loans and purchasing managers’ index besides increases in investment and retail.

In the first three months, the country's banks granted a record 4.6 trillion yuan in new loans which are considered lifeblood of the economy in the first quarter, realizing 90 percent of the goal the government set for the full year.

The Purchasing Manager's Index jumped above 50 for the first time in several months. A reading above 50 signals economic expansion.

"This shows the manufacturers are buying raw materials and the full effect will kick in after three to six months," said Galaxy Securities’ Zuo.

What also pointed to increasing manufacturing activities is an acceleration of industrial output, which rose 8.3 percent in March, after rising 3.8 percent in the first two months.

Export figures are also improving. The country’s exports dropped 17.1 percent in March from a year earlier, a much milder fall than 25.7 percent in February.

That prompted the General Administration of Customs to declare: "China's foreign trade showed marked signs of recovery in March" when releasing the figures. Commerce ministry officials said exports will continue to improve in the coming months, according to earlier reports.

Challenges ahead

But the country still face great difficulties, Li of the NBS admitted, especially considering the complex global situations.

The world economy will contract 1.7 percent this year, the World Bank said in its latest report. International trade is also expected to fall for the first time in more than a half century. That means China's exporters have a rocky way ahead and whether exports will continue to improve remains to be seen. Exports account for about 40 percent of China's GDP.

There are also questions about the sustainability of bank credit. Analysts believe most of the easy money has gone to State-sponsored projects and small and medium enterprises which employ more workers than big State firms, still find it hard to get credit.

When the banks could no longer find new government projects, they may become hesitant to lend, which may hinder an economic recovery.

"China will face great pressure" to reach the eight-percent-growth target set by authorities at the beginning of the year, said Qi of the SIC.

More stimulus measures

The government is mulling new stimulus measures to provide more impetus to the world’s third largest economy, earlier reports said.

If announced, the new measures should find ways get more private capital involved, said Zuo of the Galaxy Securities, as the current investment came mainly from the government and State firms.

Additional measures should also be adopted to promote consumption, including more help to the small and medium enterprises which employ a bulk of the country’s workforce, Zuo proposed.

If these firms weather the storm, then they could keep their workers, who in turn will continue to spend, providing a stable source of growth for the country’s economy, she explained.

"Consumption is a reliable force for us to maintain a stable and relatively fast economic growth," said Li of the NBS.