Slowdown tests China's growth and reform

China's January and February economic data is no cause for optimism.

Annualized growth of industrial value added output slowed to 8.6-percent for January and February compared to 9.9 percent in the same period in 2013, the national bureau of statistics (NBS) announced on Thursday. Fixed-asset investment during the period grew 17.9 percent, down from 21.2 percent from a year ago, the slowest growth since Dec. 2002. Retail sales of consumer goods grew 11.8 percent, also slower. The figure was 12.3 percent a year ago and 13.6 percent in December.

"Pressure on the economy has intensified," said Xu Gao, chief macro-economic analyst at Everbright Securities.

February's manufacturing purchasing managers index dropped to 50.2, an eight-month low, and exports tumbled 18.1 percent.

"The slowdown of exports, investment and consumption in January and February, along with existing problems - including excessive production capacity, high inventories and credit defaults - are worries for the market," said Lu Zhengwei, chief economist at Industrial Bank.

A report from Guotai Junan Securities said that growth would slow, and predicted downward pressure in the first quarter in particular. Guotai Junan also reduced its first quarter growth forecast to 7.5 percent from 7.6 percent.

Hua Zhongwei of Huachuang Securities, argues that the fixed asset investment figures showed little investment demand, as local governments lower growth targets to restrain production capacities and control debt. He expects investment to lessen in coming months, as better supervision kicks in and capital sources become uncertain.

On Thursday, Premier Li Keqiang reflected on 2013, when the biggest challenge was pressure on growth. He acknowledged "very limited space for maneuver in fiscal and monetary policy" and "multiple tough choices in macro-control."

However, not all is gloom and doom.

Li is confident that the economy has "potential and resilience" and can be kept under control. The 2014 growth target remains around 7.5 percent.

"The growth we want brings real benefits to the people, raises the quality and efficiency of economic development, conserves energy and protects the environment," he said.

Structural reform means stabilizing growth. "Reform will only be prioritized when growth stays within a proper range. If the economy moves outside that range, growth will be prioritized," said Shen Minggao, Citibank China chief economist.

Last week's producer price index (inflation at the wholesale level) contracted 2 percent year on year in February after dropping 1.6-percent in January. The index has been in deflationary territory for 24 consecutive months, and a looser monetary policy is quite likely, said Xu Binbin of Minmetals Futures.

In Xu's opinion, by predicting 13 percent growth in M2 this year, a broad measure of money supply, the government could hardly be seen as tightening their policy. "The message is clear, structural reform goes ahead on the condition of stable growth," Xu said.

Wang Tao, UBS economist, played down the worries: economic indices are still within an acceptable range, and the 7.5-percent growth target is likely to be reached. If recoveries in developed economies continue, external demand will increase.

Shen Minggao worries that growth of 7.5 percent will hinder reform. Credit risk in the financial market may not be mitigated soon enough, and slashing over-capacities and deleveraging means the growth target might not be achieved.