Gloomy China data prompts talk of fresh stimulus

The Chinese economy continued to slow in April, prompting predictions of more fiscal and monetary stimulus from Beijing, much of which is likely to end up in the booming domestic stock market.

Fixed asset investment, a key driver of the economy, expanded by 12 per cent in the first four months of the year from a year earlier, the slowest pace since 2000 and down from 13.5 per cent in the first quarter.

That slowdown was driven largely by sliding investment and construction in the crucial real estate sector, which is suffering from massive oversupply and tepid demand.

Overall property investment in the country grew 6 per cent in the first four months from a year earlier, a sharp deceleration from 8.5 per cent growth in the first quarter and the slowest pace since May 2009.

Growth in retail sales came in at 10 per cent in April from a year earlier, down slightly from 10.2 per cent in March but the weakest monthly reading in nine years.

China is almost certain to grow at its slowest pace in 25 years this year and the government will struggle to meet its already lowered target of "around 7 per cent" expansion.

"Today's activity data suggest that the momentum of growth during the first month of the second quarter could have slowed further to below 7 per cent," said Liu Ligang, economist at ANZ bank. "Thus, more growth stabilisation policies could be expected to roll out."

On Sunday China cut benchmark interest rates for the third time in six months in an attempt to shore up flagging activity.

The central bank has also lowered the proportion of deposits banks must hold in reserve (known as the reserve ratio requirement) twice since the start of the year, including a 100 basis point cut last month that was the biggest since the height of the financial crisis in 2008.

Most analysts expect Beijing to continue cutting interest rates and the RRR in the coming months.

"We expect sequential growth momentum to improve in the coming months, but given the deep-rooted challenges such as the severe overcapacity problem in upstream industries, any improvement will still be rather fragile," said Yang Zhao, an economist at Nomura. "Hence, we expect policy to remain accommodative."

While the government has tried to target its stimulus policies to benefit the real economy and keep construction going across the country, much of the fresh liquidity has found its way into the booming stock market, helping the benchmark index to double in the past year.

Following the data release on Wednesday, the Shanghai Composite Index fell 0.58 per cent after rising 1.6 per cent on Tuesday.

Japan's Nikkei stock index erased early losses on Wednesday to end up 0.7 per cent on hopes of fresh Chinese stimulus.

On the bright side, some analysts highlighted data suggesting the year-long slump in demand for Chinese real estate could be coming to an end.

The floor area of property sold in the first four months of the year fell 4.8 per cent from a year earlier, an improvement on the 9.2 per cent year-on-year decline in the first quarter as looser downpayment requirements and tax incentives boosted buying interest, particularly in big cities such as Beijing and Shanghai.

Industrial output grew 5.9 per cent in April from a year earlier, up from a six-year low of 5.6 per cent growth in March.

But when the effects of a late long holiday over Chinese new year were taken into account, last month's factory output marked a sharp deceleration from growth of 6.4 per cent for the whole of the first quarter.

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