China's growth target vulnerable as momentum fades

Data for April has raised the possibility that economic growth could further slow down

China might miss its economic growth target for the first time in 15 years as data points to a sharper-than-expected loss of momentum and top leaders are talking about a "new normal" of slower growth.

The government has already given itself some room on its growth target, refining it to about 7.5% and saying a couple of percentage points either side of that was acceptable.

But after annual economic growth slowed to an 18-month low of 7.4% in the first quarter, data for April has raised the possibility it could slow further.

"We maintain our view that GDP growth is on a downtrend and continue to expect it to slow to 7.1% in the second quarter," Zhang Zhiwei, an economist at Nomura, said in a report.

Financial markets hardly seem concerned. The expectation is that despite the rhetoric of accepting slower growth, authorities will step in to safeguard the target with some sort of stimulus measures, as they did in 2013. A cut in the official target, which would require parliamentary approval, would be unprecedented.

"To stop growth from sliding out of a "reasonable range", Beijing needs to ease policy a little more in the coming months, if not weeks," HSBC economists said in a report, forecasting more supportive monetary and fiscal policy.

"Policymakers have ample ammunition on both fronts though, and we think they are likely to deploy these in a more active manner in the coming months if not weeks to prevent a further deterioration in the real economy."

NEW NORMAL

If the economy just meets its target for 2014, it will still be the slowest growth since 1990. If it comes in below that, it will be the first time the target has not been met since 1999, when the economy grew 7.6% compared with a goal of 8.0%.

China's leaders have been at the forefront of lowering expectations, talking of the need to accept slower but more sustainable growth as they try to remake the economy to be driven more by consumption rather than the traditional engines of exports and investment.

 "We must adapt ourselves to a new normal of economic growth," President Xi Jinping said at the weekend.

To that end, authorities have ruled out major stimulus to accelerate growth. However, they are expected to put a floor under activity and head off any surge in unemployment that could be seen as a threat to social stability.

Premier Li Keqiang has said the economy has to grow by around 7.2% each year to create enough jobs.

Another potential concern is the uneven growth patterns in the country as the reforms are pushed through, with data showing growth slowing markedly in some provinces.

People's Bank of China (PBOC) Governor Zhou Xiaochuan said at the weekend the central bank would only fine-tune its policy to counter economic cycles and would not be taking any large-scale steps to boost activity.

SMALL STEPS

This week, the central bank told banks to improve the efficiency of mortgage lending, as a flagging property market becomes a major risk factor.

Some Chinese cities are relaxing property controls after near five years of national government efforts to restrain house prices.

On the fiscal side, measures have been targeted, such as tax cut for small firms and faster construction of railway lines.

"For the time being, China will continue to walk a fine line between growth slipping further due to negative sentiments or financial risk versus accelerating from stimulus," IHS China economist Brian Jackson said.