Schroders Quickview: China must do more to hit growth target

The latest Chinese growth data has done little to assuage concerns that China is not doing enough to stimulate its economy.

15 April 2015

Craig Botham

Craig Botham

Emerging Markets Economist

China growth is slowing

Chinese grew 7% year-on-year in the first quarter of 2015, in line with expectations, and slower than the 7.3% recorded in the final quarter of last year.

Is China doing enough to stimulate its economy?

Stimulus efforts so far do not, in our view, constitute a strong enough response to cause a great acceleration in growth.

Monetary easing, for example, has not resulted in lower lending rates on new business because banks are trying to maintain net interest margins.

Meanwhile, rates on existing lending are still higher in real terms despite nominal cuts, due to disinflation. More easing is therefore needed, and expected, this quarter.

Data suggests that China is deflating

Nominal growth actually fell below real growth for the first time since 2009, slowing to 5.8% year-on-year from 7.7% previously.

So although the consumer price index (CPI) may still be positive, China as a whole looks to be undergoing deflation.

A slower rate of growth was fully expected for the first quarter given the weakness of the property market and reduced fiscal support from local governments.

In fact, we had expected a slightly weaker number. But higher frequency data showed that March did not result in an improvement for China’s economy.

Worrying growth trends across multiple sectors

Industrial production fell to a 15-year low of 5.6%. Retail sales were at a 9-year low of 10.2%.

Investment growth came in at a record low as property.

Manufacturing investment continued to struggle, despite the easing measures undertaken by the central bank in recent months.

In part this may be because, with a GDP deflator of -1.2%, real rates are still climbing despite policy easing measures.

Doubts grow over 7% growth target

It is an open question whether things will improve meaningfully from here.

The first quarter of 2014 was a weak quarter, providing a lower base effect to flatter performance this year.

This will be reversed for the second quarter onwards, so a substantial pick-up will be needed if the 7% target is to be reached.

Important Information: The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.  To the extent that you are in North America, this content is issued by Schroder Investment Management North America Inc., an indirect wholly owned subsidiary of Schroders plc and SEC registered adviser providing asset management products and services to clients in the US and Canada. For all other users, this content is issued by Schroder Investment Management Limited, 31 Gresham Street, London, EC2V 7QA. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.