China cuts 2019 GDP growth target as services growth falls to 4-month low

Beijing cut its economic growth target for this year and unveiled tax cuts and infrastructure spending to boost growth, as it emerged on Tuesday that growth in China's services sector eased to a four-month low in February.

The Caixin/Markit services purchasing managers' index fell to 51.1 last month from 53.6 in January, dropping to its lowest level in four months and coming in well below the consensus forecast of 53.5. A reading above 50 indicates expansion while a reading below signals contraction.

The data showed that new export orders were at their weakest level in five months.

Pantheon Macroeconomics said: "The survey suggests that the shift in labour to services from the under-pressure manufacturing sector continued last month, albeit at a more moderate pace than January. The forward-looking indicators on employment aren’t as optimistic, though, with backlogs of work contracting for a second straight month in February, and at a rate not seen in more than three years.

"The more volatile Caixin gauge, relative to the services measure in the official non-manufacturing survey, was due a correction, after spiking in recent months. As such, last month’s fall isn’t particularly alarming, at this stage. It does, however, pour even more cold water on the fairly stable official measure for February which, on our adjustment, was much softer."

Meanwhile, Chinese Premier Li Keqiang said in his government work report that the growth target rate for this year has been cut to a range of 6% to 6.5% from about 6.5% last year, factoring in the trade war with the US, high debt levels and financing bottlenecks for private enterprises, among other things.

The lower end of the GDP target would be the slowest pace of economic growth in almost three decades.

IG market analyst Chris Beauchamp said: "China’s shift to a less ambitious GDP target is not as worrying a development as it might at first appear, since a more modest growth target should calm fears about mis-directed investment and a rush for growth at all costs."

In addition, the budget deficit target was expanded to 2.8% of GDP from 2.6% last year and the local government special bond quota was lifted to 2.15 trillion yuan from 1.9 trillion last year. China's CPI inflation target was left at 3%.

Li told delegates at the National People's Congress of China that to boost growth, the country would aim to deliver nearly 2 trillion yuan ($298bn or £227bn) of tax cuts. VAT for the transport and construction sectors will be cut to 9% from 10%, while VAT for manufacturers will drop to 13% from 16%.

China will increase its military budget by 7.5% to 1.2 trillion yuan, down from last year's 8.1% increase.

Li said: "We will face a graver and more complicated environment, as well as risks and challenges. We must be fully prepared for a tough struggle.

"Growth in the global economy is slowing, protectionism and unilateralism are mounting, and there are drastic fluctuations in the prices of commodities...Instability and uncertainty are visibly increasing, and externally generated risks are on the rise,” he said.

London Capital Group analyst Jasper Lawler said: "Tax cuts, increased lending and infrastructure spending, rather than continuing along the deleveraging route, will get some quick wins for China. However, this may be a dangerous route in the long run. High levels of debt are a problem, which will only be exasperated as growth slows.

"Whilst shares across Asia were broadly lower, the plans to increase spending boosted shares in China. The CSI300 hit a 9-month high in early trade before giving back some gains. As more details over the economic package are released over the coming days, we could see Chinese shares extend their rally."

Bart Hordijk, market analyst at Monex Europe, said: "The yuan appeared to have almost stoically accepted the downgrade of the 2019 Chinese growth forecast to its lowest rate since 1990 at 6-6.5%, accompanied by the rare admission that trade tensions with the US are at least partially to blame for this.

"The fact the yuan didn’t jolt on the downgrade can, on the one hand, be explained by the fact this was widely expected, after Manufacturing PMIs sharply deteriorated earlier, pointing to a potential contraction in this vital sector in this year. Another explanation could be that markets appreciate the wisdom of Chinese policymakers to let go their growth target in favour of deleveraging their high debt levels. In the short term this may imply lower growth, but in the long run this may mean more financial stability - or at least the staving off of a hard landing after a sudden debt crisis. The latter is a real concern, as defaults on corporate debt are rising and levels of bad debt at Chinese banks are approaching their highest level in 20 years."