China's factory and investment growth flagging

Reuters , Friday 12 Dec 2014

China's economy showed further signs of fatigue in November, with factory output growth slowing more than expected and growth in investment near a 13-year low, putting pressure on policymakers to unveil fresh stimulus measures.

In a sign that banks were already responding to Beijing's instructions to reflate the economy, however, new lending jumped 56 percent in the month.

Weighed down by a sagging housing market, China's economic growth had already weakened to 7.3 percent in the third quarter, so November's soft factory and investment figures suggest full-year growth will miss Beijing's 7.5 percent target and mark the weakest expansion in 24 years.

"The data bodes ill for GDP growth in the fourth quarter, which is bound to slow further," said Dariusz Kowalczyk, senior economist at Credit Agricole CIB in Hong Kong.

Growth in real estate investment also slipped for the first 11 months of 2014, though property sales registered their best month this year, buoyed by Beijing's efforts to revive a sector on which so much of the economy depends.

After September's move to cut mortgage rates and downpayments for some home buyers, the People's Bank of China cut interest rates on Nov. 21 for the first time in two years.

The surprise rate cut signalled policymakers' growing concern that a sharper slowdown in the economy would raise the risk of job losses and loan defaults.

Factory output rose 7.2 percent in November from a year earlier, down from October's 7.7 percent, the National Bureau of Statistics said on Friday, and missing analysts' forecasts of 7.5 percent.

Fixed-asset investment, an important driver of growth, grew 15.8 percent in the first 11 months from the same period last year, slipping from 15.9 percent in the first 10 months.


The rise in new loans comes after sources told Reuters on Thursday that the People's Bank of China (PBOC) had instructed banks to lend more and had quietly relaxed the enforcement of loan-to-deposit ratios to further that end.

"The lending numbers give hope that investment will pick up now that there is more funds available to pay for capital spending projects," said Kowalczyk.

Not all the new lending is being put to productive use, however, as some will just replace existing debt, and there is evidence that speculators are ploughing some of it into a wild stock market rally of recent weeks.

The cash doesn't appear to be flowing into trade, as data earlier this week showed China's imports and exports slowed sharply in November.

And despite the resulting expansion in the money supply, consumer inflation also hit a five-year low, stoking expectations that Beijing may move more aggressively to stave off deflation, including a cut to banks' reserve requirement ratio (RRR), which would allow them to lend still more.

"We're ready for an RRR cut at any point. We think there will be 100 basis points of cuts over the next couple of quarters," said Tim Condon, head of Asia research at ING in Singapore.

The closure of many factories in northern China early in November to reduce air pollution as Asia-Pacific leaders met in Beijing won't have helped industrial output, while demand for products such as concrete and steel will have been hit by slackening growth in export orders and the cooling housing market.

A bright spot in November was retail sales, where growth ticked up to 11.7 percent from 11.5 percent in October, which was the slowest pace since early 2006.

Analysts expect further interventions by Beijing in 2015 after top leaders at the annual Central Economic Work Conference on Thursday pledged to make fiscal policy "more forceful" while keeping monetary policy "not too tight or too loose".

Economists who advise the government have recommended that China lower its economic growth target to around 7 percent in 2015.

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