China economic growth dips to 8.1% in the first quarter

Dr Gary Liu, Deputy Director of the Lujiazui International Finance Research Centre: "China's problem is with its monetary policy"

China's economy, the world's second-largest, has expanded at its slowest pace in almost three years.

Gross domestic product increased by an annual rate of 8.1% in the first quarter, down from 8.9% in the previous three months.

That is less than many analysts had forecast with most of them expecting a figure closer to 8.3%.

China has been hit by a drop in demand in key markets including the US and Europe.

At the same time domestic demand has proved tough to stimulate.

"We are slightly disappointed. The main downside was with exports and some in terms of consumption," said Kevin Lai of Daiwa Capital Markets.

'Gradual slowdown'

On Thursday, the World Bank warned that China's economy may slow further in the coming months.

"China's gradual slowdown is expected to continue into 2012, as consumption growth slows somewhat, investment growth decelerates more pronouncedly and external demand remains weak," said Ardo Hansson, the World Bank's lead economist for China.

The bank cut its growth outlook for the Chinese economy for 2012 to 8.2% from its earlier projection of 8.4%.

It cautioned that a slowdown in Beijing's key export markets and "the ongoing correction in China's property markets" were key risks to growth in the future.

Too slow?

Start Quote

The basic threat is that the credit squeeze may hurt investment and slow growth more than the policymakers would want”

End Quote Richard Jerram Bank of Singapore

The rise in property and consumer prices in the country has been the focus of China's policymakers over the past few months.

The central bank has taken various measures to curb lending in an attempt to control consumer price growth and keep property prices in check.

The measures appear to be having the desired effect.

The rate of inflation, which hit a three-year high of 6.5% in July last year, has since slowed down. Consumer prices in March rose by 3.6% from a year earlier, lower than the government's target of 4% for the year.

At the same time, property prices have fallen for a five consecutive months, easing concerns about the formation of asset bubbles.

However, analysts said that while the government's policies had yielded positive results, authorities needed to ensure that they maintained a balance between sustaining growth and keeping prices in check.

"The basic threat is that the credit squeeze may hurt investment and slow growth more than the policymakers would want," said Richard Jerram of the Bank of Singapore.

"It is difficult to manage it precisely, which is why people continue to be worried that things might slow down too much."

'Likely to improve'

China's policymakers have already taken some measures to loosen its monetary policy. The central bank has cut the reserve ratio requirement, the amount of money that banks must hold in reserve, twice in the past few months in a bid to boost lending.

Yuan notes China's central bank is making a push to increase lending in a bid to boost growth

The move has been successful as data out on Thursday showed that banks extended 1.01tn yuan ($160bn; £100bn) in new loans in March. Analysts had forecast a figure of 800bn yuan.

At the same time, data out on Friday showed fixed asset investment, one of the key drivers of China's economy, grew 20.9% during the first quarter.

Analysts said increased lending was likely to boost investment and growth in the coming months.

"We have seen a good sign that liquidity from reserve ratio requirement cuts and open market operations is moving into the real economy," said Dongming Xie of OCBC Bank.

"As such, I think the growth picture is likely to improve in the second quarter."

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