China GDP growth slowed further in the year to March, coming in on market expectations of 7.0% yoy and stronger than my forecast of a dip below 7.0%. However March month activity indicators were much weaker than expected highlighting the headwinds the economy is facing, making further broad-based easing measures seemingly inevitable.
The GDP result seemed inconsistent with the sharper than expected decline in industrial production, fixed asset investment, exports and retail sales but strong growth in the services sector provided a welcome offset. It still remains to be seen the extent to which the current activity weakness is a reflection of Chinese New Year distortions, which came later than normal this year.
Possible distortions aside the Chinese economy is facing considerable headwinds from the continued decline in the property market, high real interest rates and strength in the Chinese Yuan. The good news is the decline in the property market is showing early signs of bottoming out and there is plenty the Government can do to ease financial conditions. We expect further interest rate cuts and reductions in the Reserve Requirement Ratio in the months ahead.
Remember though that a slowing China growth rate is not necessarily a bad thing. We remain of the view that slower growth is necessary for longer term stability. At issue right now is the pace of the slowdown. Further easing measures will be implemented to manage the slowdown, not reverse it.
The official growth target is 7.0% for calendar 2015. Given the starting point and the headwinds that target appears unlikely to be met, even with additional easing measures. But I think it will be close – I’m still happy with my forecast of 6.8% growth in 2015.