China: Economic Recovery Looks to be Running Out of Steam

Consensus Forecasts

China’s economy slowed unexpectedly to 7.7% (y-o-y) in the first quarter, down from a slightly stronger expansion of 7.9% in the fourth quarter of 2012. Signs of renewed softness have sparked fears that the economic recovery, which only started in the middle of last year, is already beginning to run out of momentum. However, officials have been playing down the significance of the weaker GDP data, and have put it down to the current difficult global climate and government efforts to rebalance the economy towards consumption and away from exports and investment. Beijing’s leaders have acknowledged that the frenetic pace of growth the country has enjoyed in the past is no longer sustainable and the emphasis now is on stable growth. Still, the recent slowdown in economic activity cannot be ignored, especially in light of the weak spate of data releases for March. Leading indicators such as industrial output moderated sharply to 8.9% (y-o-y), down from 9.9% in January-February, while nominal retail sales and fixed asset investment growth also disappointed. In another worrying sign about the strength of the economic recovery, industrial profits slowed sharply to 5.3% (y-o-y) in March, against 17.2% in January-February. In light of recent soft data releases, real GDP growth forecasts for 2013 have dropped sharply this month.

Meanwhile, latest data show that bank lending is surging in spite of Beijing’s efforts to rein in credit growth. The country is awashed with liquidity on the back of strong capital inflows, which is fuelling explosive credit growth. Concern is now mounting about the build-up of debt in China, leading to Fitch Ratings, a leading debt rating agency, to downgrade the country’s sovereign debt last month.

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