Policy easing aimed at bolstering demand

Officials are expected to take a four-pronged approach in the coming months to reduce growth risks.

China's economic growth in the first quarter of 2015 was 7 percent year-on-year, the slowest since 2009, while investment grew only 2.8 percent, becoming the main drag on the economy. New jobs created in the first quarter added up to 3.24 million, 0.2 million less than the same period last year, and both the manufacturing and non-manufacturing purchasing managers indexes stayed below 50, suggesting reduced use of labor. The GDP deflator dropped into negative territory (-1.1 percent), implying the current growth rate is below potential. In other words, there is a negative output gap.

House sales slid 9 percent year-on-year and housing inventory rose 25 percent, while revenue from government land sales fell 36 percent. The sharp drop in land-sale revenue, along with tighter control of local government debt, will likely dampen infrastructure investment for the rest of the year. High-frequency data, such as new order indexes (as part of PMI), suggest the growth downturn has not run its course yet. And we forecast that GDP growth could fall further to 6.7 percent in the second quarter. We thus expect the government to take a four-pronged easing approach in the next few months to reduce growth risks.