The Financial Times last week reported that China may have dropped its growth target for 2013 by 0.5 percentage points following comments made by the country’s finance minister, Lou Jiwei.
The “unscripted comments” made by Mr Jiwei suggested China’s GDP expansion target for 2013 was 7 per cent, down from the 7.5 per cent set out during the national parliament in March.
The comments have since been rectified by the Chinese government, but the implication that China is willing to accept slower growth this year remains.
China has been under increasing pressure with a raft of weakening data hitting the headlines in recent weeks.
Trade data for June reveals that Chinese exports had suffered the biggest contraction in more than three and a half years, plummeting 3.1 per cent in the month.
The data from the General Admissions of Customs further shows that exports to the US, China’s second-biggest export market, fell 5.4 per cent in June, while exports to the European Union dropped by 8.3 per cent, a result of a trade dispute.
Imports, meanwhile, fell 0.7 per cent, leaving a trade surplus of $27.13bn (£17.9bn).
Earlier this month, the emerging market country also suffered from weak manufacturing data which caused the Shanghai Composite index to fall 0.8 per cent in the immediate aftermath. Although not a devastating movement, it did come after a 4.5 per cent slump that had taken place in the last week of June – the biggest five-day fall since February 18-22.
According to data from the National Bureau of Statistics of China, the Purchasing Managers’ Index (PMI) for June fell to 50.1, down from May’s reading of 50.8.
It has been widely reported that China – the world’s second-biggest economy – is suffering a ‘cash crunch’, a result of a tightening of lending between the country’s banks. Reports suggest that the interbank lending rate briefly surged to 30 per cent in June this year, a significant increase from the average 2.5 per cent rate the country’s banks are used to.
Ben Gutteridge, fund analyst at Brewin Dolphin, says: “It appears China’s new leadership have initiated a ‘short-term pain, long-term gain’ policy. Their keenness to purge the ‘shadow banking’ system suggests the availability of credit to the major growth drivers of previous years (infrastructure projects and state-owned enterprises) will become increasingly restricted.
“Though the new leadership will be careful not to let growth disappoint too drastically, we see little prospect for Chinese growth to reaccelerate in the coming quarters.”
Mr Gutteridge warns that this outlook is a “clear headwind” to emerging market asset price performance and commodity related shares.
Frank Yao, senior portfolio manager in the Greater China investment team at Neuberger Berman, agrees that the Chinese equity market should not be written-off by investors. “The new political leadership has made a concerted effort to move toward long-term market reform rather than rely on stimulus packages to foster growth,” he says. “As the market builds confidence in the new leadership’s reformist-based approach and recognises that the rate of inventory destocking has started to stabilise, we expect the asymmetry between equity market performance and GDP and earnings growth to correct.”
