WSJ China’s Stumble Is More Than Seasonal

China’s Stumble Is More Than Seasonal

Play it again, Sam, could be the unofficial motto of the Chinese economy this time of year.

For the fourth year in a row, China has stumbled out of the gate. The latest sign was HSBC’s preliminary purchasing managers index for March, which dipped below 50, indicating a contraction in activity.

A separate proxy measure of growth by Capital Economics—mixing electricity production, transport usage, and the like—is at its lowest since the 2003 SARS crisis. The proxy indicates growth on a year-over-year basis in the first quarter will dip below the government’s full-year target of 7%.

China naturally starts the year slowly because of the Lunar New Year holiday, during which factories shut down and workers go home. But that happens every year, so year-over-year growth indicators should take that into account.

ENLARGE

The ever-slower starts could be because companies have less cushion and confidence than they used to, suggests Andrew Batson of GaveKal Dragonomics. Corporate decision makers become scared that the slow start to the year wasn’t just a bump in the road, but the start of a prolonged downturn.

A property market that has failed to respond to the removal of lending curbs could be intensifying fears that this year is different. Most entrepreneurs in China are property investors in some form, through their companies’ use of real estate as collateral and investment, or because they own property in their personal accounts. A 5% drop in prices nationwide is understandably undermining confidence.

Stock market investors seem to think the slow start is fodder for Beijing to pump more stimulus into the economy. The Shanghai Composite, already up strongly thanks to interest-rate and reserve requirement ratio cuts, has taken another leg up and is now 14% higher than where it started the year.

And it does look increasingly likely that Beijing will have to do more to support growth. A campaign of bank reserve-requirement cuts, more interest rate cuts, further loosening of property curbs and increased fiscal spending from the central government are in the cards.

The official target for government deficit spending is 2.3% of GDP, though Finance Minister Lou Jiwei said it will actually be 2.7%. Because outstanding government debt is low, there’s room for Beijing to borrow. It’s a sign of the times that China’s deficit spending could run higher than America’s, which the Congressional Budget Office pegs at 2.6% this year.

The past few years, China has been able to prevent slow starts from getting too far out of control. As time goes by, China will have to dig deeper to keep up the streak.

Write to Alex Frangos at alex.frangos@wsj.com

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