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 The figures came a day after data showed deflationary pressures
intensified in the factory sector in February, reinforcing
expectations of more interest rate cuts and other policy loosening
to avert a sharper slowdown in the world's second-largest economy.
"Activity data surprised the market on the downside by a large
margin, suggesting that China’s first quarter GDP growth could
likely fall to below 7 percent," ANZ economist Li-Gang Liu said in a
research note.
"In our view, the extremely weak data at the beginning of the year
suggest that China needs to engage in more aggressive policy easing,
and we see that a reserve requirement ratio (RRR) cut will be
imminent," he said, adding that stimulus measures rolled out since
last year seem to have had limited effect.
Industrial output grew 6.8 percent in the first two months of the
year compared with the same period a year ago, the National Bureau
of Statistics said on Wednesday, the weakest expansion since the
global financial crisis in late 2008.
Analysts polled by Reuters had forecast a 7.8 percent rise, down
slightly from December.
 Retail sales rose 10.7 percent, the lowest pace in a decade and
missing expectations for a 11.7 percent rise.
Fixed-asset investment, a crucial driver of the Chinese economy,
rose 13.9 percent, the weakest expansion since 2001 and compared
with estimates for a 15 percent gain.
"Fixed asset investment will likely face even more challenges,"
economists at Credit Suisse said in a note this week, adding that
crackdowns on corruption and shadow banking have heavily squeezed
spending by local governments.
"Local officials and executives at state owned enterprises are more
worried about their jobs than investment ... The central government
is pushing out more investment projects, but with the aim of
partially offsetting losses in local investment, rather than
accelerating growth."
China combines its January and February data releases for
investment, retail sales and factory output to minimize distortions
from the Lunar New Year holiday, which fell in late January last
year but in mid-February this year.
Sluggish factory activity reinforces expectations that China's
economic growth will slow to a quarter-century low of around 7
percent this year from 7.4 percent in 2014, even with expected
additional stimulus measures.
Power generation rose 1.9 percent in January and February from a
year earlier, well below 3.2 percent seen in all of 2014.
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Yin Weimin, minister of human resources and social security,
cautioned this week that China's labor market also faces greater
pressure. Employment fell more in January and February than in the
same period last year, he said, while adding that he was confident
China can still create more than 10 million jobs this year.
BUCKLE SEAT BELTS
The Chinese economy has had a rough ride in the last 15 months as a
property downturn compounded slackening growth in foreign and
domestic demand and persistent industrial overcapacity. A widening
corruption crackdown also has weighed on everything from investment
to retail sales.
Policymakers have cut interest rates twice since November, and in
early February reduced the amount of cash that banks must hold as
reserves (RRR), freeing up fresh liquidity to flow into the economy
to offset rising outflows of capital.
But because those adjustments so far have been largely defensive in
nature, economists say, they haven't translated into lower real
interest rates or increased investment. Chinese companies are
cautious about expanding in the face of weak business prospects, and
bankers are wary of a spike in non-performing loans.
With consumer inflation hovering near the government's "vigilance
level" of around 1 percent, analysts expect the central bank to
lower reserve requirements and interest rates again to head off a
potential deflationary cycle, in what would be its biggest easing
campaign since the global crisis.
The central bank has singled out the rise in real interest rates on
the back of cooling inflation as a further drag on the economy,
especially as many companies are struggling with heavy debt levels
and end-user demand remains weak.
"Double-digit industrial production levels will be a thing of the
past," said Chester Liaw, an economist at Forecast Pte in Singapore.
"It is highly unlikely that retail sales will hold out for long
above the 10 percent mark as well."
(Writing by Pete Sweeney in SHANGHAI; Editing by Kim Coghill)
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