Slowing industrial output puts GDP target in doubt

Experts predict interest rate cut imminent

China's value-added industrial output grew by 6.9 percent year-on-year in August, marking the lowest reading since December 2012, data released Saturday by the National Bureau of Statistics (NBS) show. Value-added industrial output is an important component to overall GDP as it equals the difference between the gross output of the industrial sector and all of its costs such as energy and raw materials. The Global Times interviewed three experts to get their views on the slowdown in the indicator's growth.

Li Wei, a Shanghai-based economist at Standard Chartered Bank

Value-added industrial output increased by 6.9 percent year-on-year in August, coming in far below July's 9 percent growth rate and well short of market expectations. If value-added industrial output growth continues to slow, it will be very unlikely for China to meet its 7.5 percent GDP growth target for 2014. The latest figure highlights the gap between Beijing's hopes and the economic reality. The authorities appear to want to continue to rely on targeted monetary easing and reforms to support growth, but more aggressive policies will be needed to meet this year's growth target. The targeted easing measures have had diminishing returns. In many cases, these measures are too vague or too limited to boost market sentiment and investor confidence.

Beijing will have to roll out more aggressive policies to meet its GDP growth target for 2014, despite its apparent reluctance to loosen further now. The reserve requirement ratio (RRR) is expected to be cut for all banks by 50 basis points, in addition to a more targeted re-lending policy to support sectors such as railways and social housing.

An across-the-board RRR cut will not necessarily mean the government is backpedaling on reforms. The market should see it as a countercyclical measure specifically designed for the current situation. It can easily be reversed when growth stabilizes.

Wang Tao, chief China economist at UBS Securities

Economic activity in August slowed more than expected, with value-added industrial output growth slowing to a rate not seen since December 2008. While last year's high base can explain half of the drop, the cause for the rest of the drop lies largely with the ongoing slowdown in real estate, which has led to weaker heavy industry production, lower energy demand, easing automobile and appliance sales and a further deceleration in corporate investment.

Premier Li Keqiang said at the recent World Economic Forum meeting that the government will rely more on targeted easing and reforms rather than strong fiscal and monetary stimulus to support growth, noting that the country has already fulfilled this year's target for job creation. Nevertheless, August's much weaker value-added industrial output growth and an expected further slowdown in property construction will test the government's resolve. The market expects additional policy support to arrive in the coming months, including a possible interest rate cut.

In the coming months, the authorities should come up with more policy support, albeit on an intermittent and reactive basis. Aside from further eliminating administrative approvals to encourage private investment, the authorities also should do the following. First, they should use more targeted monetary and credit easing. Second, they should further accelerate ongoing infrastructure and social housing (shantytown renovation) construction and launch new key projects with large spillover effects for the economy in areas such as water, energy and environment. Third, they should cut down payment requirements for first-time home buyers to support property demand.

The suggestion of an interest rate cut in the next one or two quarters may appear to run counter to the current government rhetoric of using targeted rather than across-the-board easing measures, and against the central bank's objective of pushing forward interest rate liberalization.

However, interest rate cuts during a period of interest rate liberalization is perfectly compatible with keeping reforms on track - the former is a countercyclical policy to buffer the economy from the current growth downturn, while the latter is a structural reform that should help improve capital allocation over the medium term.

Gao Yuan, a senior analyst with Haitong Securities in Shanghai

Value-added industrial output growth tapered off in August, setting off concerns about a further slowdown in economic activity and growing deflationary pressure in the last two quarters of 2014 and into 2015.

In August, exports declined on weak external demand. Infrastructure construction growth slowed sharply. Investment in the manufacturing industry remained weak because of overcapacity and deleveraging. These were the factors behind August's lackluster economic data.

It appears that it will be difficult for China to hit this year's GDP target of 7.5 percent. The market expects the central government will undertake fiscal and monetary easing to stimulate the economy.

To begin with, the government will accelerate infrastructure construction to increase domestic demand. Moreover, it is very likely the government will cut interest rates, aiming to directly lower overall funding costs.