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China growth slowest on record

China struggled out of the gate this year with its weakest quarter on record, but a pick-up in March showed the world's third-largest economy was on track for stronger growth in coming months.
/ Source: Reuters

China struggled out of the gate this year with its weakest quarter on record, but a pick-up in March showed the world's third-largest economy was on track for stronger growth in coming months.

A surge in lending and public spending cushioned a collapse in exports, suggesting that while Beijing may yet do more to prop up demand, it need not launch a new stimulus package on the scale of its 4 trillion yuan ($585 billion) plan announced last year.

Annual economic growth slowed to 6.1 percent in the first quarter from 6.8 percent in the fourth quarter, official data showed on Thursday, slightly missing economists' 6.3 percent forecast and marking the weakest expansion since quarterly records began in 1992.

But analysts said that quarter-on-quarter growth, which the government does not publish, was in the range of 5.3-6.2 percent in the first quarter, considerably above their estimates of 0.9-2.5 percent for the final three months of 2008.

"The series of policies to expand domestic demand and promote stable and quite fast growth are beginning to show results," the official Xinhua news agency said summarizing a meeting of China's State Council, or cabinet.

"There are positive changes in the economy and the situation is better than expected," said the report of the meeting, which was chaired by Premier Wen Jiabao.

The cabinet also struck a cautious note, warning against "blind optimism" about the economy. It promised to take steps to encourage private investment, which it said was still too weak, and said it would study how to attract more foreign investment.

The cabinet vowed to tweak existing stimulus measures and guide the flood of bank credit to ensure it reaches the economy, but it made no mention of a new stimulus package, an idea that had surfaced as a market rumor in recent days.

Analysts said the economy's momentum lent more credence to Beijing's assurances that it can reach its 2009 growth goal of 8 percent, widely seen as a minimum for creating enough jobs for the country's ever-expanding labor force.

Shares in Shanghai see-sawed as the market digested the data to close 0.1 percent lower. World stocks eked out small gains after Asian markets pulled back from a six-month high and the safe-haven yen gained as investors abroad took China's weak quarter as a sign of the frailty of the global economy.

With the United States, Japan and much of Europe all deep in recession, investors count on China to lead the global recovery and many had bet on a stronger number that would send a clear signal that the world's main growth engine was back in business.

Yet when economists looked beyond the headline figure, they found reasons for optimism that China's recovery will gather steam in coming quarters.

Annual growth in urban fixed-asset investment surged unexpectedly to 28.6 percent in the first three months, while annual industrial output growth rebounded to 8.3 percent in March from a record low 3.8 percent in January-February.

"The economy has started to benefit from the end of the massive destocking process as well as the government's stimulus package," said Mingchun Sun at Nomura Global Economics in Hong Kong. "In fact, much stronger-than-expected bank lending and investment growth in the first quarter suggest that growth could be very strong in the second half," he said.

Where opinions differed, it was about the pace of the rebound, rather than the upward direction of the economy.

"We think that the economy will remain subdued in the next few months but should start to improve gradually in the second half of 2009," said Brian Jackson, economist at Royal Bank of Canada In Hong Kong.

Still, the numbers were not strong enough to dash market hopes that Beijing would top up its stimulus package with more spending as depressed global demand for Chinese-made goods would continue to weigh on the economy.

"The situation is still quite challenging as seen in the fall in the output of foreign-owned companies, which are mostly geared to exports," said Suan Teck Kin, economist at United Overseas Bank in Singapore, who sees full-year growth at 6.5 percent.

In a sign that the economy still faces a bumpy ride in months ahead, the Shanghai Securities News reported that the decline in China's power consumption, a measure of economic activity, accelerated in the first 10 days of April.

On a positive note, deflationary pressures appeared to ease at the consumer level with prices falling 1.2 percent in March from a year earlier, in line with expectations and a less marked fall than in February.

Producer prices, however, fell 6.0 percent in March from a year ago, more than expected and faster than the 4.5 percent annual drop in February.