This represents the slowest pace of growth for 18 months, but authorities appear to be ruling out major stimulus to fight short-term dips in growth, signalling the slowdown was an expected consequence of their reform drive.
Last year the Chinese government set its growth target for 2014 at 7.5% as part of its efforts to stabilise the economy following many years of fast-paced expansion. However there are concerns that any further slowdown in Chinese growth will have a negative impact on the global economy.
While the Q1 figure came in only marginally below the target figure, Nancy Curtin, chief investment officer of Close Brothers Asset Management, believes the fear of stuttering growth in China is becoming a reality.
“Reform is underway in the country to shift economic impetus away from investment and towards consumption. At the same time, the government is taking steps to curb the credit excesses of prior years, as Chinese officials continue to tolerate selective defaults.”
Together, said Curtin, these steps are arresting short-term momentum in the world’s second largest economy.
“If allowed to continue, the slowdown will weigh heavily on any global recovery in 2014. As things stand, with personal sector debt now at more than 200% of GDP, stalling growth means China may prove to be a financial accident waiting to happen.”
“The government has the tools and liquidity necessary to steer the path – and it has done so in the past,” Curtin added.
“But it needs to act now to provide the stimulus needed to hit the magic number of 7.5% GDP growth this year, and stabilise the economic outlook while it undertakes the Herculean task of economic rebalancing, new market disciplines, and credit reform.”
Stuart Parks, head of Asian equities at Invesco Perpetual, said China continues to dominate the Asian investment landscape.
“China’s economic and equity market performance have disappointed. This has largely been due to concerns over China’s ability to move away from its unsustainable reliance on credit-fuelled investment, particularly in infrastructure and real estate. In the period since the global financial crisis, China’s debt-to-GDP ratio has increased from around 120% to 220%, with much of the debt financing projects of questionable profitability.”
Last November’s announcement of an ambitious reform agenda gave grounds for optimism, in Parks’s view, particularly initiatives focused on allowing market forces a more ‘decisive’ role in the allocation of resources, improving capital allocation and shifting income towards households. The critical question for him is whether the authorities are prepared to let growth drop below their 7.5% growth target as they try to implement reforms.
“Until we see evidence of reforms, scepticism over China’s resolve to rebalance its economy and ability to control credit growth will remain a headwind for markets in the region,” said Parks. “However, China has proven in the past that it can change quickly when challenged and there have been encouraging developments in other economies across the region. In our view, now is not the time to despair about China and the region in general as we believe that very little hope is being reflected in market valuations.”
