Chinese economy slowed down steeply

The Chinese economy slowed down sharply in January and February 2014, with industrial output, retail figures and investment growth falling to near-record lows. Analysts were surprised at the extent of the slowdown and believe China is heading into trouble.

It is becoming progressively more likely that the Chinese government will have to loosen policies very soon in order to boost growth, or at least attempt to avoid a risk of recession, which would be devastating for employment numbers.

China needs high growth to absorb its annually growing working population.

Factory output growth down

Instead of a 9.5% increase which markets had expected, industrial production expanded by 8.6% in January and February, the country’s worst performance since the second quarter of 2009, according to figures published by the National Bureau of Statistics.

Accumulated data so far this year suggests that the Chinese economy slowed down during the first quarter of 2014, probably to a growth figure of 7% annualized.

If growth falls below 7%, local media say the People’s Bank of China, the country’s central bank, is ready to do what it takes to loosen monetary policy, including reducing the minimum cash reserve requirements banks are legally bound to keep.

The majority of economists outside China believe the authorities will wait for further data in a couple of months’ time before deciding on any further easing.

Retail sales & fixed-asset investment growth down

Chinese economy slowed down
Is China heading for a recession?

Apart from factory output, other sectors of the Chinese economy slowed down too. Retail sales growth has decelerated to its slowest rate since 2011, increasing by 11.8% in January and February 2014 compared to the same period in 2013. Markets had predicted a rise of at least 13.5%.

Fixed-asset investment, which had been expected to rise by 19.4% during January/February 2014 compared to January/February 2013, grew by just 17.9%, the lowest rate since 2003.

Chinese economy slowed, despite holiday period distortions

The National Bureau of Statistics released two-months’ worth of data (Jan/Feb) in an attempt to minimize the distortions that exist in one-month data caused by the Lunar New Year holiday period. During this period much of the country’s workforce stops work – factories, shops and offices close down for extended periods.

Last week, Chinese authorities announced that exports had dropped by 1.6% in January/February compared to Jan/Feb 2013, while in just February this year exports nosedived by 18.1%, causing severe jitters in the financial markets.

Signs China has some economic problems

Even when holiday-period distortions are factored in, there are clear signs the Chinese economy slowed down because of other problems too. The Communist Party said last week that its target for GDP (gross domestic product) growth for 2014 is 7.5%.

As each week passes this year and new data on the Chinese economy comes out, it is looking more and more likely that the country will miss its 2014 growth target, something that has not occurred for a long time.

For the first time, senior government leaders are hinting at “flexibilities” in the 7.5% target. Premier Li Kegiang and Finance Minister Lou Jiwei have stressed that “the target is flexible.”

Last week, Shanghai Chaori Solar Energy Science & Technology, became the first private company registered in China to default on the interest payments on its corporate bonds. Chinese authorities had been expected to bail out the company. This has not occurred. It may be because many more defaults are on the way and there is not enough money in the world to help them all, so the government is being selective.

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