* China cut banks’ reserve requirement ratio 50 bps to 20.0
pct
* Move followed weak April trade, production and investment
data
* Bank of America/Merrill Lynch cuts growth estimate to 7.6
pct Q2, 8 pct 2012
* Analysts predict fiscal response on top of further policy
easing
By Nick Edwards
BEIJING, May 13 (Reuters) – China may need a back-up plan to
stop economic growth being cut short by a surprise dip in demand
at home and abroad that suggests monetary policy easing steps
taken since the final quarter of last year are insufficient to
deal with the downturn.
The People’s Bank of China cut the amount of cash that banks
must hold as reserves on Saturday, freeing an estimated 400
billion yuan ($63.5 billion) for lending to add to the roughly
800 billion injected in two previous 50 bps cuts since the
government tilted its policy stance towards growth in October.
The move came after data on Friday showed the economy
weakening, not recovering, from its slowest quarter of growth in
three years. Industrial production growth slowed sharply in
April and fixed asset investment – a key growth driver – hit its
lowest level in nearly a decade, confounding economists
expecting signs of a rebound in Q2 data.
“There are risks that policy loosening may under-deliver. If
fiscal spending doesn’t speed up quickly, GDP growth faces the
risk of going below 8 percent in Q2,” Zhiwei Zhang, chief China
economist at Nomura in Hong Kong, told Reuters.
“The critical factor to watch now is fiscal policy. We
expect more policy measures on this front will be announced in
coming weeks. Premier Wen said on April 13 that “we need to
prepare back-up plans in case growth weakens further”. Now that
growth has indeed weakened more, it is time for the back-up
plans to be rolled out,” Zhang said.
April 13 was when China revealed its weakest three months of
growth on an annual basis in nearly three years, at 8.1 percent.
Back then many economists, including Zhang, thought that
would mark the bottom of China’s current downswing – especially
as new bank lending data for March published the day before had
topped 1 trillion yuan in the strongest showing in a year – and
triggered widespread raising of bearish 2012 growth forecasts.
Last week’s data, by contrast, saw economists at UBS and
Bank of America/Merrill Lynch slash their growth estimates
within hours of the numbers being published and call for policy
action to achieve growth of around 8 percent, widely regarded as
government’s aim, rather than the 7.5 percent official target.
FASTER, FATTER SPENDING
Faster, fatter spending on infrastructure and social
housing, more tax breaks for business and incentives to boost
consumer spending are among the typical additional measures
called for.
That would be on top of the measures already anticipated –
including another 100 bps of required reserve ratio cuts for
banks in the second half of the year – to keep growth on track.
“We were wrong and we revise down growth forecasts,” was the
straight-to-the-point heading in the message line of an email
sent to clients by Ting Lu, China economist at Bank of
America/Merrill Lynch in Hong Kong after Friday’s torrent of
data drowned his call of a Q2 GDP bounce to 8.5 percent.
He now expects growth of 7.6 percent in Q2 and 8 percent for
the year versus 8.6 percent previously. The consensus forecast
for 2012 growth in the benchmark Reuters poll before Friday’s
data was 8.4 percent.
Lu is struggling to understand why the April data was so far
away from market expectations and thinks a new reporting system
requiring China’s 700,000 biggest manufacturers, representing 90
percent of the total value added in the factory sector, to
submit numbers directly the National Bureau of Statistics in
Beijing – rather than local offices – might be the root cause.
Whatever is behind the drop-off, the new consensus view is
that Beijing will have to raise its game to stop the rot.
Especially as trade data earlier in the week saw an annual
rate of export growth around half the level expected and growth
in imports grinding to a halt on a nominal basis in April,
underlining China’s vulnerability to weakness in global demand
for goods produced in the country’s vast factory sector.
“The April data reconfirmed our view that the first quarter
was not the bottom. If anything, the trend seems to be slightly
worse than what we had priced into our call for 7.8 percent
year-on-year real GDP growth in Q2,” Yao Wei, China economist at
Societe Generale in Hong Kong told Reuters.
Yao expects action on three fronts – accelerating
infrastructure investment, easing property tightening policies
and rolling out a package of tariff cuts and consumption
incentives.
CREDIT DEMAND KEY
Whatever Beijing’s fiscal response, few expect stimulus
spending modelled on the 4 trillion yuan ($635 billion) splurge
unveiled in the wake of the 2008-09 global financial crisis,
which buoyed growth but triggered spikes in inflation and real
estate speculation that the government spent two years
correcting.
Meanwhile further easing in monetary policy is likely to
have to boost demand for credit, rather than simply making it
available. Chinese banks need to lend about 850 billion yuan in
both May and June to hit the 2.4 trillion yuan Q2 lending quota
the market believes Beijing is working towards.
Monthly loan growth of 800 billion has only been achieved
eight times since 2004, five of those occasions while China was
rolling out its 4 trillion yuan stimulus programme.
That, for many analysts, makes a fiscal response more likely
given the government’s deep pockets after a record tax take in
2011 and a modest deficit target of 1.5 percent of GDP –
especially as going down that route makes it easier for Beijing
to order loans to be extended to hit the credit creation target.
And with a leadership transition looming towards the end of
this year, analysts are certain that China’s Communist Party
chiefs will do all they can to engineer a soft landing for the
economy and as smooth a handover of power as possible.
“A quickened and strengthened policy stimulus is key for
stabilizing China’s growth in the coming months. Chances of more
aggressive easing have increased,” analysts at HSBC said in a
client note.
“The immediate delivery of RRR cut right after the weak
April data suggest that Beijing is responding actively. We
expect more aggressive delivery of policy stimulus via
quantitative easing, substantial tax breaks, fiscal spending and
investment deregulation in the coming months to ensure a soft
landing.”
($1 = 6.3106 Chinese yuan)
(Editing by Alex Richardson)
