Economic Watch: Slowing economy challenges policymakers

Chinese economists are concerned about China's economic decline and what, if anything, policymakers can do to arrest it, after China's economy grew at a slower pace in April and key economic indicators moderated.

Value-added industrial output, an important economic indicator, expanded 6 percent year on year in April, lower than the 6.8-percent increase for March, and the market expectation of 6.5 percent, official data showed on Saturday.

The country's fixed-asset investment and retail sales of consumer goods also eased slightly last month.

PACE SLOWER BUT GROWTH SOLID

CICC, a Beijing-based investment bank, attributed weak industrial output largely to a less favorable base effect compared with March, and one fewer working day than last April.

"The underlying trend of industrial production growth remains solid, with April industrial production growth higher than the 5.8-percent year on year expansion recorded in the first quarter," according to a CICC report.

In the first four months, China's fixed asset investment (FAI) growth softened to 10.5 percent year on year, lower than the market consensus of 11 percent.

Although FAI growth softened, growth of FAI measured in capital terms strengthened to 8.1 percent year on year in the January-April period, up from the 6.4 percent registered in the first three months, indicating a solid footing, said the CICC.

The slowdown in headline retail sales growth from 10.5 percent year on year in March to 10.1 percent in April was largely due to the decline of automobile sales driven by the implementation of new emission standards starting from April.

"On the other hand, retail sales of most other discretionary spending items edged up, including catering, home decoration, furnishing, jewelry, etc. Therefore, the underlying trend remains solid for consumption growth despite weaker auto sales," according to the report.

POLICY SPACE TO REMAIN ACCOMMODATIVE

Under the backdrop of weaker-than-expected economic data, UBS China economist Wang Tao said in an analytical report that it had become less likely that authorities would abruptly stop policy easing measures.

"Despite weaker headline credit numbers, overall credit growth and the credit impulse remained very strong," said Wang. M2, a broad measure of money supply that covers cash in circulation and all deposits, rose 12.8 percent year on year to 145 trillion yuan (22 billion U.S. dollars) at the end of April, lower than the 13.4 percent year-on-year growth in March, according to the People's Bank of China.

"Given the official GDP and credit growth targets for this year, the government's policy stance should stay largely stable in the next few months," according to Wang.

He said he expects credit policy to remain largely accommodative.

At the same time, Wang warned the government to control financial risk as he believes policy easing momentum has already peaked.

SLOW BUILDUP IN PROPERTY

Digging into the April data, there were fresh signs of a return to life in the property market, with both investment and sales accelerating.

In the first four months of 2016, investment in China's property sector rose 7.2 percent year on year from the 6.2-percent gain in Q1. Meanwhile, in floor terms, property sales jumped 36.5 percent, higher than the 33.1-percent gain in the first quarter.

Infrastructure spending also remained strong, up 19 percent year on year in the first four months of the year.

In Wang's opinion, strong property sales and starts should underpin property construction and investment, while the impact of earlier policy and credit support on investment has yet to be fully reflected.

He said the current economic growth is sustainable, in the context of strong real estate sales growth in the short term and supply-side reform in the long run.

"Although the momentum of the recovery weakened in April from March, we still expect growth in the next two quarters to be stronger than in the first quarter," said the UBS economist.

In the face of continued economic headwinds, China has made supply-side reform an economic priority, and tax cuts to lower the cost of doing business are a likely policy option.

Supply-side structural reform -- essentially cutting overcapacity and shifting to higher value-added manufacturing -- is generally regarded as a harder path to set out upon, but a more sustainable one. Endi