China growth lowest since 2009 as property and manufacturing drag

China’s economy expanded at its slowest pace in six years in the first quarter, held back by a slowdown in construction and manufacturing as the government seeks to re-engineer the country’s growth model.

Chinese growth underpinned the global economy in the wake of the financial crisis, but it has been slowing year by year since 2011, affecting everything from the price of iron ore to global sales of luxury goods.

For emerging markets that rely on Chinese demand for their commodities, the slowdown is adding to the strain as they brace themselves for the effect of a US interest rate rise that is expected later this year.

China’s gross domestic product grew 7 per cent in the first three months of 2015 compared with the same period a year earlier, the country’s National Bureau of Statistics said on Wednesday — the weakest quarterly expansion since the depths of the global financial crisis in early 2009. China’s economy grew 7.3 per cent in the fourth quarter of 2014.

The Chinese government had previously announced a growth target of “around 7 per cent” for 2015. “We have the ability to keep economic operation within the proper range,” Premier Li Keqiang told the Financial Times in an interview on March 31.

“This is not going to be easy but we will do our best and we can do it,” Mr Li added in his first interview with a western media organisation since assuming office two years ago.

An economic slowdown in China is widely seen as inevitable but also necessary as the country tries to move from its traditional dependence on smokestack industries towards domestic consumption and services.

“We expected the fall in economic growth,” Sheng Laiyun, NBS spokesman, said on Wednesday. “As the economy enters the ‘new normal’, the drop in growth rate is good for structural adjustment and transformation.”

However, policy makers want to avoid an abrupt slowdown that could cause unemployment to spike and trigger a wave of defaults that could threaten financial stability.

The People’s Bank of China has cut interest rates twice since November in an effort to stimulate investment by lowering borrowing costs. But analysts say companies remain loath to invest even at lower rates, given weakness in final demand and highly indebted corporate balance sheets, especially among state-owned firms.

Separate data out on Wednesday added to the picture of a slowdown. Factory output grew at a record low pace of 5.6 per cent in March, well below the previous low of 6.8 per cent in January and February.

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“The big surprise is that industrial production is very weak. But the service sector is holding up pretty well,” said Zhu Haibin, chief China economist at JPMorgan in Hong Kong.

“If you look on the positive side, this shows that rebalancing is continuing. But it highlights the near-term risk coming from manufacturing and real estate.”

Fixed-asset investment — which includes spending on infrastructure, factory equipment and property construction — grew at a 14-year low of 13.5 per cent in the year to March, down from 13.9 per cent in the first two months.

Meanwhile, retail sales, viewed as a rough proxy for consumption, grew at a nine-year low of 10.2 per cent.

Beyond monetary easing, Chinese local governments have also announced plans to boost infrastructure spending this year in an apparent effort to compensate for the declining investment in construction and factory equipment.

Mr Sheng's comments on Wednesday suggest the government intends to use infrastructure investment to buffer the investment slowdown in other sectors.

“China has made great achievements in infrastructure in recent years but infrastructure per capita still trails far behind developed countries,” he said.

“The space for further infrastructure investment is still large.”

Late last month the government rolled out fresh measures to support the ailing property market, eliminating restrictions on mortgages and expanding a capital gains tax exemption for homeowners.

“The weaker Q1 GDP growth and much weaker than expected March activity data suggest that growth momentum remains weak, which calls for further policy easing,” Nomura analysts led by Yang Zhao wrote in a note. 

Nomura forecasts one interest rate cut and one cut in banks’ required reserve ratio in each of the three remaining quarters of 2015.

The investment share of China’s overall economy remains far higher than that for any other major economy, but there were signs of moderate progress on Wednesday.

Mr Sheng said the investment share of GDP growth probably declined in the first quarter, while net exports rose and consumption was stable, although he said exact figures had not been finalised.

China’s trade surplus surged in the early months of 2015, as resilient export demand from the US combined with plummeting commodity prices that reduced China’s import bill.

Consumption contributed 3.8 percentage points to China’s full-year GDP growth last year, compared with 3.6 percentage points for investment and zero for net exports.

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