China Economy, Construction and Lumber Shipments
China is calling it “steady growth.” But as the world’s second-largest economy huffed out its most anemic quarter in six years, it came with new signs that the slowdown is gathering momentum and more dramatic intervention will be needed if Beijing hopes to maintain current levels.
China posted 7 per cent growth in its first quarter, its National Bureau of Statistics said, in a report that also highlighted the changing landscape for a country struggling to find a new footing as it days of heady growth fade into the past. In the first three months of 2015, industrial profit was down 4.2 per cent, domestic lending fell 3.7 per cent, foreign investment tumbled 33.5 per cent and the square footage of residential construction starts decreased 20.9 per cent.
The Chinese economy is still expanding overall, with retail sales up 10.6 per cent while online stores posted a roaring 41.3 per cent improvement.
But the “new normal” that China’s leadership has described is quickly raising the potential for new problems. In 2014, China achieved 7.4 per cent GDP growth, its worst in 24 years.
The statistics bureau on Wednesday warned that the country must place priority on employment growth, a sign of worry that workers, too, will soon feel pain — a primary concern for a government worried about social stability.
“They see rising pressure in the job market. I think this is very important,” said Zhou Hao, Shanghai-based China economist with Australia and New Zealand Banking Group Ltd., or ANZ. “The policy tone has changed significantly.”
HSBC, in a research note, pointed out that March growth in fixed asset investment fell to 13.5 per cent, “a historic low.” Exports dropped 14.6 per cent in March.
“There’s enough talk now and enough actual data to suggest that the economy is slowing and would warrant more action,” said John Zhu, greater China economist at HSBC. “Our view is that 7 per cent is reachable,” and China may even exceed that figure — but only with a concerted response that is likely to include strong new spending on roads, railways and ports to advance its Silk Road plans. HSBC also expects a pair of 25-point interest rate cuts between now and September.
Mr. Zhu called 7 per cent a “floor” for Chinese authorities determined to meet that number as a growth goal for 2015.
Chinese premier Li Keqiang has in recent weeks increasingly laid the groundwork for a more aggressive response. In a Tuesday economic symposium in Beijing, he said the country must prepare for greater difficulties and “intensify efforts” to keep growth in a “proper range,” according to remarks reported by state media.
Observers expect adjustments to interest rates and reserve requirements for banks. But China faces tough choices as it seeks to act without hurting the yuan.
“Money is leaving the system more rapidly than the central bank is able to print,” yet Beijing is reluctant to respond by injecting more cash because “then the currency will be under pressure, and the government doesn’t want the currency to go down,” said Kevin Lai, a chief economist with Daiwa Securities in Hong Kong. “So I think we are kind of stuck.”
Others warn, too, that government intervention only delays an inevitable reckoning that grows worse the longer it is held off. Michael Pettis, a professor of finance at Peking University, has warned that another two or three years of 7 to 8 per cent growth could be “followed by a very ugly contraction once debt capacity is exhausted.” He expects Chinese growth, on average, to top out at 3 to 4 per cent in the coming decade.
With a more robust U.S. and Euro-zone, that matters less to the world than it did in the dark days of the economic crisis. “China is important, but it’s not as crucial as it would have been two or three years ago,” said Gabriel Stein, a monetarist economist who is a director at Oxford Economics. Other underlying factors in China are more worrisome, like an accumulation of debt that is likely to produce a banking crisis, Mr. Stein said.
“The banks are attempting to prop up companies, which in the Japanese context we would have referred to as zombie companies,” he said. “And that means that non-performing loans will remain an issue going forward.”
At the same time, critics say the Chinese effort to slow its economic descent is impacting the trustworthiness of its statistics.
“It’s getting harder and harder” to square the official GDP number with other economic indicators that suggest a more dramatic tumble, said Mr. Lai. “There’s a credibility issue here. In reality, I think growth has to be much weaker than 7 per cent.” He pointed to first-quarter electricity usage, which was flat, and industrial production, which climbed just 5.6 per cent in March.
“It’s not meaningful any more looking at the GDP numbers,” he said.
China’s average new home prices continued to fall in March, but on a narrowing trend that is expected to continue as the government’s stimulus policies bolster sales volumes.
Average new home prices in China’s 70 major cities dropped 6.1 percent last month from a year ago, the seventh consecutive month fall, following February’s 5.7 percent decline.
But the monthly fall between March and February was 0.1 percent, narrowing from a 0.4 percent fall in the previous month, with the capital city of Beijing braking eight consecutive drops and rising 0.3 percent, as prices continue to stabilize.
China’s gross domestic product grew at its slowest pace in six years at the start of 2015, building expectations that authorities will roll out more policy stimulus to avert a sharper slowdown.
Growth in China’s real estate investment in the first quarter slowed to 8.5 percent from a year earlier, the lowest rate since 2009 as developers focused on clearing excess inventory, but property sales volumes decline narrowed, down 9.2 percent.
Price recovery will be slow, however, weighed by inventory still at its high level especially in the lower-tier cities, as many developers are resorting to price cuts to reach sales targets.
“The slowing decline in home prices was in line with expectations and it didn’t show big improvement. After the stimulus policies in late March, we have to have at least three more months of solid data to confirm a bottoming of the housing downturn,” said Roseleaf Yao, an economist at Gavekal Dragonomics based in Beijing.
“If we don’t see much better data, the government will have to roll out more loosening policies such as raising the household leverage.”
The National Bureau of Statistics (NBS) data on Saturday showed new home prices in Beijing rose 0.3 percent between March and February, bouncing from a 0.2 percent fall in February from January, while Shanghai prices were flat following a 0.1 percent fall. Another top-tier city, Shenzhen, rose 0.7 percent after 0.2 percent last month.
Liu Jianwei, a senior statistician at NBS, said in a statement that he expected home sales and prices to continue to stabilize.
China has implemented a series of loosening policies since the third quarter in 2014, relaxing home purchase restrictions, cutting interest rates, and easing bank reserve requirements to bolster the housing market, which accounts for some 15 percent of GDP.
The latest policy measures include lowering second-home mortgage terms and increasing home-buying tax breaks.
BC softwood lumber export volume to China in the first two months of 2015 was 911,429 cubic meters as compared to 1.128,427 cubic meters over the same period in 2014, a decrease of 19.2%. BC softwood lumber export value over this same period was 183.06 million, a decrease of 10.3%.
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