China risks fresh demand downturn
Beijing, May 10, 2012
China risks a fresh downturn in demand for goods from its massive factory sector, with weaker than expected exports and stalling headline import growth signalling that government spending is the crucial factor keeping the economy moving.
Annual growth in imports in April was just 0.3 percent, far below forecasts of an 11 percent increase, while exports managed growth of just 4.9 percent versus expectations of 8.5 percent, customs data on Thursday showed.
Shipments to emerging economies experienced a drop alongside well-flagged European weakness.
"We know the external climate is not particularly conducive to strong export growth and digging into the data you can see primarily it is a euro zone story, which is to be expected," Alistair Thornton, China economist at IHS Global Insight in Beijing, told Reuters.
"But the headline number on import growth is less expected and more worrying. It does point to a real weakness in the domestic economy and shows that we have not yet turned the corner into a sustained recovery."
The risks to China's factory-focused economy of weakness in private sector final demand were underscored by a drop-off in shipments from Asian economies that feed China's export-oriented assembly lines, while robust imports from Australia and solid annual volume growth in raw material imports indicate that state-led infrastructure spending underpins economic activity.
Asian shares lost ground after the numbers and the Australian dollar, sensitive to expected demand from the biggest market for the country's commodities, pared gains made following strong local jobs data.
The question now being asked by investors is whether the Chinese government, which has ramped up spending on social housing and basic infrastructure as part of its pro-growth policy bias since the autumn of 2011, should take further steps.
"At the moment the evidence is not yet decisive enough to say that the government needs to do more," Wang Tao, China economist at UBS in Hong Kong, said.
Calendar-adjusted month-on-month export growth was 9.4 percent while imports rose 7.3 percent on the same basis. Year over year, the growth rates were 7.2 percent and 4.8 percent, respectively - a sign that demand at home and abroad might not be as bad as the headline data implies.
"We think government easing has already been coming through in social housing construction and infrastructure spending," Wang said, adding that the gathering consensus view that China's economy had bottomed out remained valid.
Other economists agreed that Thursday's data alone was insufficient to trigger fresh easing steps, such as a quick cut to the reserve ratio requirements (RRR) for banks that would give them more money to lend.
"It doesn't change much for monetary policy," Yao Wei, China economist at Societe Generale in Hong Kong, said.
"The PBOC is experimenting with a new approach to manage liquidity. Instead of using required reserve ratio cuts, they are conducting reverse repos, which gives them more flexibility. I don't think this report changes the outlook that much." - Reuters