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China first quarter GDP at 18-month low, to cut reserve ratio for small banks

A shipping container is lifted by a crane at a port in Lianyungang, Jiangsu province April 10, 2014. REUTERS/China Daily

By Adam Rose and Xiaoyi Shao BEIJING (Reuters) - China's economy expanded 7.4 percent between January and March, its slowest pace in 18 months, prompting authorities to act for the second time in as many weeks to shore up growth. Hours after the National Bureau of Statistics released the data, Premier Li Keqiang was quoted by state media as saying that China would reduce the amount of cash that some village banks hold at the central bank to help the farm sector. The relaxation of reserve requirements, alongside tax breaks for more companies to support job creation, comes just two weeks after China took its first step this year to juice its slackening economy - cutting taxes for small firms and speeding up investment in railways. The unveiling of new pro-growth measures in quick succession suggests China may be more worried about the foundering economy than it lets on, even though it has ruled out the use of major stimulus to fight short-term dips in growth. "We don’t expect the amount of liquidity released to be significant for the economy," Zhang Zhiwei, an economist at Nomura in Hong Kong, said in reference to the reduction in the reserve requirement ratio for village banks. "Nonetheless, this is another loosening signal from the government, which suggests it is probably more concerned about the economic outlook." The gross domestic product data was slightly stronger than the median forecast of 7.3 percent in a Reuters poll, but still slower than 7.7 percent in the final quarter of 2013. It was China's slowest annual growth since the third quarter of 2012, when the world's second-largest economy also grew 7.4 percent. "The slowdown of China's economy is a reflection of a transformation of the economic mode," said Sheng Laiyun of the statistics bureau. "There is no fundamental change in the improving trend of China's economy." MORE POLICY LOOSENING? Li was quoted by state media as saying that reserve requirements would be relaxed for qualifying village banks, but did not say when and by how much the ratios would be lowered. China's central bank sets different reserve requirements for banks, depending in part on the size of their loan business. The ratio stands at 20 percent for China's biggest banks, which face the most onerous requirements, and fall as low as 16 percent for smaller, rural banks. To support employment, which Li reiterated is the first priority for his government, tax breaks for entrepreneurs will be extended until the end of 2016 and broadened to include all industries and types of workers. The tax incentive had originally lapsed at the end of last year. To assuage investor anxiety about China's stumbling economy, Beijing said in early April it would cut taxes for small firms and speed up investment in railways to try to steady growth near its target of 7.5 percent. Modest in scope and a far cry from the 4 trillion yuan stimulus unveiled by authorities in 2008/09, analysts say the measures unveiled this year will help China avoid a bruising downturn without disrupting its plans for reform. Crucially, they do not add to China's problems of overcapacity and debt as well. But some analysts believe it is a matter of time before China takes more forceful action to energise growth, such as relaxing reserve requirements for major banks to free up more funds in the economy. Activity data for March, released with the GDP report, showed that factory output growth hit a near five-year low of 8.8 percent, just below expectations. Cumulative fixed-asset investment in the first three months of the year was 17.6 percent higher than a year earlier, again on the low side of forecasts, and at a level not seen since December 2002. Only retail sales growth was slightly above forecasts with an annual increase of 12.2 percent. "It's not bad enough to change monetary policy, but forward indicators suggest that in the next few months we will see more aggressive easing," Stephen Green, an economist with Standard Chartered in Hong Kong, said before the government announced its latest steps to spur growth. Green expects a 50-basis-point cut in the reserve requirement ratio for major banks in coming months. SERVICES IMPORTANT The services sector, which includes retail, made up 49 percent of GDP in the first quarter, 4.1 percentage points more than the industrial sector. Growth in retail bodes well for the labour market as the services industry is now the biggest employer in China. "The resilience of the relatively labour-intensive services sector has helped the labour market hold up reasonably well in the first quarter, even though it cooled," Louis Kuijs, RBS economist in Hong Kong, said in a note. Previously released figures for March had raised concerns that the economy was losing more momentum than expected, and even though first-quarter GDP was slightly better than forecast, those worries remained. Exports fell for the second month in a row and imports dropped sharply in March, while money supply grew at its slowest annual pace in more than a decade. Official and private surveys also show the manufacturing sector continuing to struggle.($1 = 6.2107 Chinese Yuan) (Writing by Adam Rose and Koh Gui Qing; Additional reporting by Kevin Yao and Aileen Wang; Editing by Nick Macfie)