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Chinese economy off to a slow start in Year of the Horse

Publication Date : 02-02-2014

 

China's factory activity slowed to a six-month low last month, while property price gains eased, marking a sluggish start to the Year of the Horse and deepening concerns about a slowdown in the world's No. 2 economy.

Fresh data indicates that a contraction in new export orders and tighter credit conditions last month are starting to bite even China's largest firms, which had previously held up against a broader slowdown in the vast manufacturing sector.

Another key pillar of the Chinese economy - the housing sector, which affects some 40 sectors from construction to resources - showed a softening in prices that could depress property investments this year.

Prices of new homes rose 9.4 per cent last month, the slowest increase in nine months and reversing seven straight months of double-digit year-on-year increases, a poll by consultancy E-House said yesterday.

Meanwhile, a cut-back in consumer and government official spending, which typically peaks during Chinese New Year, may have affected demand not only for banquets and gifts, but for even more staple items like pork.

While Chinese consumers traditionally feast more on pork during the festive season, hog prices surprisingly fell last month, according to OCBC economist Tommy Xie.
Electricity output - a popular proxy indicator of economic health - has also slackened in recent weeks.

All these indicators raise concerns that China is losing momentum faster than expected.

"China's economy is seeing a weak start to the new year. Growth for the first quarter may be sluggish," said Xie.

Analysts warn against reading too much into China's January and February economic data, which is typically skewed by festive seasonal factors.

But they are already forecasting that for the whole of this year, the Chinese economy could slow to 7.4 per cent, its lowest level in 24 years.

This deceleration could further hurt emerging markets, which suffered a sell-off in their currencies last week.

Some analysts say these markets are counting on stronger growth and demand in China to help them stabilise from an exodus of foreign funds, as the US Federal Reserve unwinds its monetary stimulus.

China's latest Purchasing Managers Index (PMI) readings could add to jitters about emerging markets, which last Friday dragged both the Dow Jones Industrial Average and S&P 500 to their lowest levels since May 2012.

The official PMI - a gauge of China's factory activity that tracks the larger firms - dropped to a six-month low of 50.5 last month, the National Bureau of Statistics and China Federation of Logistics and Purchasing said yesterday.

This was down from 51 the previous month and in line with market expectations.

The 50 mark separates expansion from contraction.

The data mirrors that of Friday's HSBC/Markit PMI reading, which surveys smaller firms. It showed a 1 percentage-point drop to 49.5 in January, the first contraction in six months.

China's bigger enterprises, particularly state giants, are now seeing the benefits of last year's government stimulus investments wear off. They are also feeling the pinch from Beijing's tighter credit conditions.

"Large firms were doing pretty well up until last month. But now they are seeing the same deterioration in conditions as smaller firms, which had been decelerating over the past few months," said Capital Economics economist Julian Evans- Pritchard.

The tighter credit conditions will "likely weigh on large firms' performance in coming months", he added.

 

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