With China slowing down, given the latest economic statistics, just how big a deal it is?

The Chinese government released its latest industrial production (IP), fixed asset investment (FAI), and retail sales data about a few hours after Premier Li Keqiang’s conference with the reporters on Thursday, March 13, 2014, which showed that for the months of January to February 2014, industrial production fell to 8.6 percent, vs median estimates of 9.7 percent; Retail sales rose around 11.3 percent, versus December 2013’s average of 13.6 percent; Fixed asset investments, excluding rural households, rose to 17.9 percent, versus the median estimates of 19.5 percent. All these latest economic data releases are potentially pointing to an overall impending downturn of the Chinese economy, and there are questions over the validity of Premier Li’s previous remarks at the recently concluded National Party Congress (NPC), where he said that China’s overall economic growth could hit 7.5 percent by end 2014.

In the reporter’s conference held on March 13, Premier Li was questioned over his remarks on 7.5 percent, and he was quoted in his replies, “The GDP growth target is around 7.5 percent. ‘Around’ means that there is some flexibility and we have some tolerance.” Thomson Reuters News quoted another Chinese official, Mr. Xu Shaoshi, the head of the pro-growth National Development and Reform Commission, who said on Wednesday that the 7.5 percent target would be lower limit for the government. In view of the latest remarks by the two Chinese officials, it is quite obvious that the Chinese government is not forcing, or rooting for a firm 7.5 percent number, instead, it is willing to show some flexibility in its approach to managing the Chinese economy. This is quite a different stance adopted by previous Chinese leaders, as they have always emphasised on increasing the nation’s overall Gross Domestic Product (GDP) growth or growth at all costs. That has led to the past rises averaging approximately 9.0 percent to 10.0 percent overall GDP growth. This time round, the new Chinese leaders have steered clear of its sole focus on growth, and instead focusing on how to improve the quality lives of the Chinese people as a whole, and it includes things such as the environment, affordable housing, among other Chinese citizen’s concerns.

With the Chinese economy facing an impending slowdown, it bears to questions as to how big a deal it is. If one were to look at the reasons for Thursday, March 13’s falls in all the major US stock indices, one could tell that aside from geopolitical tensions, such as the Ukraine conflict, the poor showing on the Chinese data has also impacted the US equity performance. This is a reflection of just how bad the data is impacting the overall global equity performance. In addition, the Chinese local equity markets, including the Shanghai Composite Index, and Shenzhen Composite Index, have all declined to ‘bear’ market territories. ‘Bear’ market territories are loosely defined as market declines of more than 200 points from its previous peak.

Market observers have been debating over how and what policies will the Chinese government undertake to counter the possible slide of the economy to below 7.5 percent, or at worst below 7.0 percent. The March 13 Reuters article quoted one of the China economists, Ms. Wei Yao from Societe Generale as saying that the People’s Bank of China (PBOC) might come out and start to reduce bank reserve requirement ratios (RRR), or the amount that banks are able to lend out, by approximately 50.0 basis points (bps). Major Banks currently have put aside a fifth of their cash reserves and such as measure would represent the central bank’s strongest policy easing since 2012. It is unlikely that big infrastructure spending or other pro-credit induced spending growth fiscal policies will be utilised, unless the country’s growth is completely veered off course, and heading towards a severe downturn. Barring any significant slowdown happening over the course of 2014, it is thought that the Chinese government will minimise its use of debt to spur growth, and instead let the market forces, including private entities to help revive the economy. This has great implications especially as to how the current Chinese government viewed about the current slowdown. There is concern expressed by the Chinese leaders, but they do not want China to return back to its former past, focusing solely on growth, and in the process, create disharmony, or civil unrest among Chinese people. The focus is on how to improve the quality of living, and it does not necessarily have to come from infrastructure-led growth.

About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Hock Meng Tay, CAIA has written 181 post in this blog.

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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About Hock Meng Tay - Chief Editor, Asia-Pacific Region

Chief Editor, Asia-Pacific Region Hock Meng Tay is a CAIA holder and is currently taking CFA qualification. He has over 10 years of experience working as research associate in several investment companies.He is an expert in financial analysis and has published research reports in his current role. He obtained his Masters of Business Administration in Integrated Management and Masters of Arts in Economics while serving his internship in Starsource Inc

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