Consumption is up due to a stable job market and an increase in disposable income in Q1
China’s economic growth slipped to 7.4 percent in the first quarter, signaling more downward pressure for the world’s second largest economy. However, authorities have ruled out the possibility of major stimulus to fight short-term dips in growth and plan to seek growth momentum through deep-seated reforms and reinvigorated domestic consumption.
The first-quarter growth rate marked the lowest quarterly growth level since the third quarter of 2012. But even so, the figure still outperformed the 6.6 percent growth in the first quarter of 2009, during the global financial crisis.
“The figures suggest growth in the world’s second largest economy in the beginning of the year 2014 was stable and that the economy was generally in good health, as Chinese authorities are more focused on reforms, restructuring and the improvement of people’s well-being,” said Sheng Laiyun, Spokesman of the National Bureau of Statistics (NBS), when releasing first-quarter economic figures at a press conference on April 16.
China is shifting gear in terms of growth rates, adjusting its economic structure and digesting the after-effects of previous stimulus packages. To shield its economy from the fallout of the global financial crisis, a 4-trillion-yuan ($644.4 billion) stimulus package was launched in November 2008.
China’s macroeconomy will inevitably come under downward pressure in 2014. However, the ostensibly weak data also contains positive factors, bolstered by many achievements in economic restructuring.
Traditional industries such as steel and cement are experiencing a fall, while hi-tech industries show accelerating growth. The share of gross investment in the service industry and private investment continues to rise.
Along with slowed industrial production growth, the service sector continued to grow in the first three months and made a larger contribution to GDP growth.
Target achievable
The Chinese Government has set a target of around 7.5 percent for economic growth in 2014. It has said that a figure slightly above or below the target would be acceptable because its main focus is on creating jobs and improving people’s well-being.
Earlier, when addressing the keynote speech to the Boao Forum for Asia annual conference, Chinese Premier Li Keqiang emphasized that the Chinese Government will not opt for a massive short-term stimulus because of temporary volatility.
“A growth rate under the 7.5-percent target is acceptable so long as sufficient creation of employment is ensured,” Li said. “With all the principles established and policy options at our disposal, we can handle all possible risks and challenges,”
Streamlining administration and further tax reforms are two of the options on the agenda.
A slew of more targeted pro-growth measures, including tax cuts for small and micro enterprises, greater support for shantytown renovation and more investment in railways construction in underdeveloped regions, have been adopted in an attempt to achieve steady growth around its target without disrupting plans to restructure the economy.
Wang Jun, a senior researcher at the China Center for International Economic Exchanges (CCIEE), said recently adopted pro-growth measures will definitely lift the Chinese economy.
“These measures aim to stabilize growth. I think the economic momentum will increase from the second quarter and there’s no need to worry that the economy will slide out of control,” Wang said.
Lu Zhengwei, chief economist with the Industrial Bank, said GDP data is better than expected.
“Considering the government’s supportive measures that have just been announced this month, we expect growth to rebound to around 7.5 percent in the second quarter,” Lu said. “Going forward, further monetary policy loosening may not be needed as the central bank has kept money market rates relatively low.”
Zhou Hao, China Economist with the ANZ Bank, said growth momentum has stabilized in March, despite the lackluster first-quarter data.
Ma Yao, a macroeconomy researcher with research institute CI Consulting, said first-quarter figures can’t represent the trend for the rest of the year or be used to predict the whole-year growth data.
“Many policies had just been formulated in the first quarter. Major reform measures have yet to be fully implemented. The macroeconomy is bound to pick up in following quarters after those policies take effect.”
Reform-driven growth
The Chinese Government intends to prop up the economy through reforms, rather than by the traditional means of eased monetary policy and progressive fiscal policy.
During his keynote speech at the Boao Forum for Asia, Premier Li identified reform as one of China’s growth engines for driving the Chinese economy.
If massive stimulus is an instant painkiller, reform is like minimally invasive surgery.
In 2013, a total of 416 administrative approval items were cancelled or delegated to lower governments by the Central Government. Other reform measures, such as business registration system and mixed-ownership reform among the bloated state-owned enterprises (SOEs), are underway to inject more vigor to the market.
China’s reform efforts have already paid off. In 2013, the number of newly registered companies surged by 27.6 percent.
Eyes on consumption
Upbeat consumption data is the biggest highlight among the first-quarter results.
Consumer spending against the country’s GDP was 64.9 percent in the first quarter, up 1.1 percentage points from the same period last year.
“Exports contributed less to GDP in the first quarter than the same period last year. Meanwhile, the growth in investment is slowing from the previous quarter. Therefore, consumption’s contribution to GDP is on the rise, although the specific percentage is still under calculation,” said NBS spokesman Sheng.
“It’s premature to say the Chinese economy has already been transformed from investment-driven to consumption-driven. But it’s definitely happening,” said Sheng.
People’s willingness to spend is directly connected to a stable job market and their deeper pockets.
Disposable income of urban residents increased 7.2 percent in the first quarter and rural residents’ cash income surged 10.1 percent during the same period.
Zhao Ping, Deputy Director of the Consumer Research Department under the Chinese Academy of International Trade and Economic Cooperation, said boosting investment alone will inevitably lead to overcapacity. Only by combining boosting investment and expanding domestic demand can the problem be solved.
China’s ongoing drive toward urbanization boasts the biggest potential for boosting consumption.
The State Council released the National New-Type Urbanization Plan (2014-20) on March 16. According to the plan, by 2020, 60 percent of the population will be urban residents.
Major Macroeconomic Indicators in Q1
» Consumer price index (CPI), the main gauge of inflation, rose 2.3 percent year on year.
» Industrial output grew 8.7 percent year on year.
» Fixed assets investment rose 16.3 percent year on year to 6.83 trillion yuan ($1.11 trillion).
» Retail sales expanded 10.9 percent year on year to 6.2 trillion yuan ($1 trillion).
» The per-capita disposable income of urban residents stood at 8,155 yuan ($1,311), up 7.2 percent year on year.
» The per-capita cash income of rural residents stood at 3,224 yuan ($518), up 10.1 percent year on year.
(Source: National Bureau of Statistics)
