China's annual GDP growth slowed to 7.5 percent in April to June — the ninth quarter in the last 10 that expansion has weakened — putting pressure on Beijing to quicken reforms rather than slow them to take up the economic slack.
Data showed the world's second-biggest economy slowed down in line with the median forecast in a Reuters poll after growth of 7.7 percent in the January-to-March period. Asian stocks rose on relief growth was not lower after a surprise fall in exports in June.
A spokesman for the National Bureau of Statistics (NBS) said the economy could still meet the full-year growth target of 7.5 percent, while the central bank governor said the government would increase incentives to support small businesses to try to stabilize growth.
But analysts said the slowdown would encourage the government to push harder on reforms. The alternative — pumping more cash into the economy through monetary easing — raises the risk of exacerbating already hot housing and credit markets.
"The slowdown will force the government to push reforms to help unleash new growth engines," said Xiang Songzuo, chief economist at Agricultural Bank of China in Beijing.
The latest year-on-year growth rate was the second-lowest since the global financial crisis after 7.4 percent in the third quarter of last year.
The NBS spokesman, Sheng Laiyun, said the slowdown was partly the result of Beijing's efforts to reform the economy, a program aimed at reducing its reliance on exports and investment to encourage more domestic consumption.
Investment was the biggest growth driver in the first half, contributing 4.1 percentage points to the 7.6 percent rate, while consumption contributed 3.4 percentage points and net exports made up 0.1 percentage point, the bureau said.
Other figures released on Monday showed industrial output in June rose less than expected from a year earlier while annual growth in fixed-asset investment growth in the first half lost some steam, with consumption bucking the trend.
Asian stocks rose on relief the GDP figures were not worse following a surprise fall in June exports last week that suggested the economy may face greater headwinds than first thought. The Australian dollar, highly sensitive to Chinese demand for Australian raw materials, rose.
"There will be no big change in overall policy, although the government will also try to stabilize short-term growth in its efforts to restructure the economy," Haibin Zhu, chief China economist at JPMorgan Chase in Hong Kong.
TARGET STILL ACHIEVABLE?
Analysts have steadily cut their forecasts this year for China's growth as data consistently came in weaker than expected and government comments talked of slowing growth. Ahead of Monday's economic figures, they were mostly forecasting 2013 growth between 7 and 7.5 percent.
After the latest data though, JP Morgan cut its 2013 growth forecast to 7.4 percent from 7.6 percent, a prediction that would suggest the government will miss its target for the first time since 1999, when the economy was also undergoing major reform under Premier Zhu Rongji.
Barclays Capital has also forecast that China will narrowly miss the target.
Sheng though said the target was still in sight and that reforms would benefit the economy in the long term.
"Some measures, including the intensified property tightening campaign, new rules to curb misuse of public funds and exit the previous stimulus policies, will inevitably have some impact on growth in the short term, but they will benefit our economy in the long run," he told a news conference.
An interbank cash crunch in June underscored the central bank's reluctance to pump more money into the economy. Banks have been told to make better use of the existing credit through financial innovations such as asset securitization.
Beijing is still dealing with the lingering hangover of a 4 trillion yuan ($650 billion) stimulus package implemented in 2008-2009, which resulted in piles of local government debt.
Analysts believe Beijing will step in only if growth slips below 7 percent from a year earlier in any quarter. If needed, Beijing has ample room to expand fiscal spending, by tapping into about 3 trillion yuan ($488 billion) in savings, or expand its fiscal deficit, said Ting Lu, an economist at Bank of American/Merrill Lynch said before the GDP figures were released.
The main worry for China's leaders is if the economic slowdown leads to high unemployment that could spark social unrest. So far government officials say employment is stable.
Premier Li Keqiang has been prominent in pushing for economic reform over fast-line growth, suggesting the government is in no rush to offer fresh stimulus to revive an economy in a protracted slowdown.
High on Beijing's reform agenda is to liberalize interest rates, which proponents say would help resolve deep-seated financial distortions, including a sprawling non-bank lending industry.
Banks will be encouraged to conduct financial innovations, such as credit securitization, to support the real economy.
"The government is obviously aware that such a moderate slowdown is conducive to economic restructuring. The government is still calmly carrying out restructuring and speeding up reforms despite the slowdown. This decision is correct from a long-term perspective," said Sheng.
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