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Will China's Economy Continue to Weaken?

Posted by Joseph Trevisani on Apr 18, 2014 11:07:00 AM

China's rate of economic growth would be a marvel in any other country of the world, but in Beijing it is a cause for worry.

The expansion of the mainland economy moderated to 7.4 percent in the first quarter from a year earlier. That was slightly better than the 7.3 percent forecast in the Bloomberg survey of economists but it trailed the fourth quarter's 7.7 percent pace. Industrial production and fixed asset investment were also weaker than anticipated, registering 8.8 percent and 17.6 percent respectively in March, 9.0 percent and 18.0 percent had been predicted.

The economy grew a seasonally adjusted 1.4 percent in the first quarter down from the 1.7 percent pace in the final quarter of last year. Those rates produce annualized growth of 7.0 percent and 5.7 percent. 

The government of Premier Li Keqiang is attempting to do several difficult things at once.

China has funded much of its expansion since the  financial crash by extending credit, funneling this money into the economy, originally through bank lending but over the past few years through the secondary credit market, the so-called 'shadow banking system'.

The Beijing government has been trying to rein in this sector that has provided a large percentage of the loans fueling the housing and construction boom. Many of these properties are thought to be on dubious economic footings, lacking tenants and income.

The development firms that funded these projects are dependent on cheap credit to roll over their debts. For the first time last month one of these real estate companies was allowed to go bankrupt, an event that sent shockwaves through the economy. If the People Bank of China continues to limit credit more of these firms must fail.

The slower the economy grows the more pressure there is on the Beijing planners to again expand credit to prevent widespread business failures and unemployment.

The government has also been trying to move the country to a more consumer based economy from its investment and export model.  While there has been some success, the increase in the rate of retail sales has been steadily declining, albeit on an increasing base, from a post crisis high of 19.9 percent in January 2011 to the most recent 12.0 percent in March.

Unemployment and its potential for civil unrest is not a topic that garners much external press coverage in China but it is a historical concern for any government that rules in Beijing.

Chinese economic statistics are a subject of much debate.  The headline GDP numbers are often questioned, with many observers citing a figure as low as 7.0 percent as more reflective of secondary information such as electricity usage and commodity prices.

Premier Li has said that 7.5 percent growth is necessary this year to sustain employment. He indicated that the government will not adopt "short-term and strong stimulus policies in response to temporary fluctuations in the economy".

A glance at China's GDP over the past thirty years illustrates the risk for Premier Li. China's growth has never been below 6.0 percent and the average for the period is 9.2 percent annually.

How the Chinese people handle moderating economic growth will make for a nervous year in Beijing.

Joseph Trevisani                                                                                                        

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

gdp 10


gdp 30


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