China may cut 2015 GDP growth target to around 7%: analysts

Focus article by Nurluqman Suratman

SINGAPORE (ICIS)–China is expected to cut its full-year economic growth target to around 7% despite recent cuts in policy interest rates, amid lingering weakness in the country’s overall factory activities, analysts said on Monday.

The country may announce the reduced GDP expansion target for 2015 next week, during the 13th National People’s Congress (NPC) that will kick off on 5 March.

In the past two years, the government had kept a 7.5% annual GDP growth target.

But the Chinese economy, which is the world’s second biggest, has been slowing down over the past four years, with 2014 growth decelerating to 7.4% – the slowest pace recorded since 1990.

In the current “new normal” economic environment, China’s GDP growth target this year could be lowered to around 7.0%, with greater emphasis on “rebalancing” efforts, as well as the quality, instead of quantity, of growth as market reforms accelerate, according to Singapore-based UOB Global Economics & Market Research.

 “With costs of production in China rising (currency, land, labour), the shift towards higher value added manufacturing, and also services will be inevitable … and these issues are likely to be at the top of the agenda,” they said in a research note.

“There have been reports that some foreign manufacturers are closing or cutting back their operations in China, with one company closing its two factories and retrenching about 9,000 workers recently,” the research unit said.

This was also reflected in the 3.2% year-on-year decline in January exports and 19.9% fall in imports for the month, according to UOB.

The country’s petrochemicals imports have also been declining, with sharp year-on-year falls in intake of ethylene and key polyethylene (PE), as well as naphtha, in January.

Its manufacturing output has contracted for the second straight month in February on account of volatile exports and slowing investment.

China’s official PMI reading for February stood at 49.9, up from January’s 49.8, but stayed below the 50-point threshold that indicates expansion.

HSBC’s final February PMI reading for China was more upbeat at 50.7, rising from 49.7 in January.

The official PMI survey is geared towards bigger larger, state-owned firms, while the HSBC/Markit survey focuses on smaller companies.

“China’s manufacturing sector saw an improvement in overall operating conditions in February, with companies registering the strongest expansion of output since last summer while total new business also rose at a faster rate, said Annabel Fiddes, an economist at Markit, which compiled HSBC’s China PMI survey.

But declines in new export orders suggests that foreign demand has weakened, while manufacturers continued to cut their staff numbers, albeit fractionally. Meanwhile, marked reductions in both input and output prices highlighted that deflationary pressures are still persisting, Fiddes said.

“We expect reported 2015 GDP growth in the vicinity of 7%, with continued structural adjustment to the mix of activity that makes up the headline figure,” analysts at Rhodium Group said in an earlier report.

“The biggest risks to that outcome are on the upside, in the event that there is an over-deployment of stimulus, always a strong possibility in China, which would delay needed policy reforms in all likelihood,” they said.

On 28 February, China’s central bank, the People’s Bank of China (PBoC), announced cuts in its benchmark one-year lending and deposit rates by 25 basis points to 5.35% and 2.5%, respectively, representing the second rate cut in three months. The rate cuts took effect on 1 March.

“Rate cuts are meant to lower the real borrowing cost in order to arrest the fall of economic growth,” said Singapore-based DBS Group Research.

“That said, the impact of it is unlikely to be strong because risk premium of borrowers has increased markedly from the perspective of banks. Enterprises that are in urgent need of liquidity may not be able to borrow at low cost. It is because lending from state banks is always inclined asymmetrically to large state owned enterprises,” it said in a research note.

While China’s interest rates are clearly on a downtrend, the “restraints on aggressive monetary loosening remain given domestic debts as a share of GDP exceeded 250% in 2014,” DBS said.

The next move will likely be a further reduction of the reserve requirement ratio, which is still high at 19.5%, DBS Group said.

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