Fitch: China Q1 GDP in Line With Forecast; Rebalancing Still Key

Slower Chinese economic growth in the first quarter of 2014 is in line with Fitch Ratings' forecast that real GDP growth will slow to 7%-7.5% this year, the ratings agency says.


Fitch expects a continued, policy-led slowdown aimed at curbing economic imbalances and containing leverage in the financial system. China's GDP grew 7.4% in 1Q14, according to the National Bureau of Statistics, down from 7.7% a year earlier and the lowest reading since Q312. Quarter-on-quarter growth was 1.4%, down from 1.8% in 4Q13.


Whether China can adjust to less credit-intensive growth and avoid a sharp slowdown that endangered financial or social stability is central to its credit profile, according to Fitch.


"The authorities' commitment to reform and rebalancing, subject to the constraint of maintaining full employment, is therefore a key consideration in our ratings analysis and underpins our economic forecasts," says Fitch Ratings. "Our affirmation of China's 'A+' sovereign rating with Stable Outlook earlier this month reflected our view that the mainland economy can navigate a structural adjustment without economic, financial, or political instability."


Recent announcements by China's leadership are consistent with a continuing commitment to rebalancing, notes Fitch. For example, while a small stimulus package was announced at the beginning of April, Premier Li Keqiang said last week that "short-term fluctuations in growth" would not prompt a major stimulus of the kind launched in response to the global financial crisis in 2008-2009.


While GDP growth has been below the five-year average growth rate of 8.9% for the past couple of years, it remains substantially above the 'A' category median of 3.3%.


"Our belief that China can achieve a smooth deceleration is bolstered by the effective macroeconomic policy levers at the authorities' disposal, such as the ability to steer credit conditions (for example by varying the speed of aggregate financing growth via injections of excess bank reserves)," says Fitch.


Tighter monetary conditions that allowed interbank funding costs to spike last year also contributed to macro level policy tightening, although they were aimed primarily at reducing risks to financial stability.


Furthermore, China's closed capital account and largely domestically funded financial sector make China less vulnerable to a rapid withdrawal of external funding than several other emerging markets.


However, rebalancing remains at an early stage, and the labour market's resilience could yet be tested as the process continues. Reversion to credit-led and investment fuelled growth could exacerbate the economy's structural weaknesses.


The challenge of maintaining growth and employment while pursuing rebalancing was illustrated in 2013, when investment grew faster than consumption and the total stock of credit rose to about 217% of GDP, from 198% at end-2012.

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