China grows at slowest pace since financial crisis

China's economy grew at its slowest pace since the global financial crisis in the first quarter, official data showed on Wednesday, building the case for further stimulus from policymakers.

Gross domestic product (GDP) expanded 7 percent in the three months to March from the year ago period, according to figures from the National Bureau of Statistics, in line with the forecast in a Reuters poll and lower than the 7.3 percent print in the previous quarter.

This is the worst showing since first quarter of 2009, during the height of the financial crisis, when growth pace slowed to 6.6 percent.

Quarter on quarter, the economy grew 1.3 percent, a touch lower than the 1.4 percent estimate and versus 1.5 percent in the fourth quarter.

Other data released with the GDP broadly missed expectations. Industrial output grew 5.6 percent in March from the year before, worse than the 10.9 percent expected, while retail sales rose 10.2 percent on year, shy of the 10.9 percent forecast.

The fixed asset investment in the January-March period climbed 13.5 percent, short of the 13.8 percent expected rise.

The Australia dollar tumbled following the slew of data, falling to a low of 0.7583 against the dollar from $0.7604 before, and briefly touching 90.78 yen. China's Shanghai Composite index ticked down 0.2 percent, while Hong Kong stocks gave up gains to dip marginally into negative territory.

"As expected, China's real estate slump and lethargic heavy industry continue to drag on domestic demand," said Bill Adams, senior international economist for PNC Financial Services Group.

"Chinese nominal household expenditures also grew relatively slowly in the first quarter, although some of the moderation in nominal consumer spending is surely the price effect of cheaper gasoline and diesel."

The world's second largest economy has been battling a weak external environment, sluggish domestic demand and a slowing property sector. GDP last year slowed to 7.4 percent, the slowest rate since 1990, and Beijing has set 2015 growth target at "around 7 percent."

Commuters ride bicycles near buses in the central business district of Beijing, China.
Tomohiro Ohsumi | Bloomberg | Getty Images
Commuters ride bicycles near buses in the central business district of Beijing, China.

To bolster the economy, the People's Bank of China has unleashed a slew of measures since November, including interest rate cuts and lowering the reserve requirement ratios of major banks. By most accounts, analysts expect further action and Wednesday's data will support the case.

"We maintain our forecast that China will cut the RRR by another 100bps, with each 50bps cut in Q2 and Q3 respectively, and lower the deposit rate by another 25bps in Q2, although the recent stock market boom could possibly delay the timing of further monetary policy easing," ANZ analysts said in a note.

"In the interim, more open market operations measures such as SLF and MLF will be used intensively in order to keep money market rates lower in the coming quarters,"

Slowdown expected

Analysts say markets shouldn't be surprised by the weaker growth, as it's been part of Beijing's agenda to engineer a growth adjustment to rebalance the economy away from a focus on investment.

"I'm not losing sleep on that, because I still believe this slowdown in China that we saw in the past year and a half is a managed policy choice to slow it down because the government wants to implement structural changes and balance that with growth. So if Beijing wants to boost growth, it can do it easily," said Chi Lo, senior economist of Greater China at BNP Paribas Investment Partners.

Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch Ratings, says slower growth should not be viewed as bad news if it means the economy is "adjusting to a more sustainable path."

But he adds that the adjustment would need support from consumption and "it's sobering that the economy has become so reliant on construction and real estate to generate jobs."

"The ongoing correction in real estate sector poses the biggest single risk to Fitch's outlook," he said.