China Has Room to Keep Loosening Monetary Policy, OECD Says

By Nipa Piboontanasawat

Nov. 25 (Bloomberg) -- China has room to keep loosening monetary policy to support growth as the global economy weakens, the Organization for Economic Co-operation and Development said.

“With headline inflation declining, monetary policy has scope to further offset the impact of the global downturn,” the OECD said in a semiannual report today.

The OECD joined the World Bank in cutting forecasts for China’s economic growth next year, predicting an 8 percent expansion, down from a 9.5 percent estimate in June. The central bank has already cut interest rates three times from mid-September to counter a deepening slowdown in the world’s fourth-biggest economy.

The key one-year lending rate stands at 6.66 percent.

China this month announced a $586 billion stimulus package through 2010, including infrastructure projects and tax cuts for business investment.

The plan “represents a major upside factor for the development of the economy over the next two years,” the OECD said. It suggested adding income-tax cuts, a move Chinese lawmakers have already agreed to support, according to a report in the official China Daily newspaper.

Weakening inflation also provides an opportunity for energy-price reforms, including “major” increases in electricity prices, the OECD said.

China’s economy expanded 9 percent in the third quarter from a year earlier as exports cooled. This quarter, economic growth may slow to 4 percent, the weakest pace since at least 1994, according to JPMorgan Chase & Co.

Slowing Inflation

The OECD reduced its forecast for this year’s expansion to 9.5 percent from the previous 10 percent estimate.

Inflation may slow to 3 percent in 2009 and 2.5 percent in 2010, from 6.1 percent this year, it said. Consumer prices climbed 4 percent in October, cooling for a sixth month.

A rebalancing of the nation’s growth towards domestic demand “entails stresses in some sectors of the economy, particularly the export-oriented ones,” the report said.

Exports “have been losing momentum since mid-2007, which has resulted in a marked fall in the growth of imports used in export-processing industries,” the OECD said.

Domestic demand will stay “soft” in the first half of 2009, partly because of weak real-estate investment, before gradually recovering into 2010, the report said.

As demand increases, import growth will climb, leading to a decline in the current-account surplus as a share of gross domestic product, it said. The proportion is likely to drop to 9.4 percent in 2009 from 9.7 percent this year, falling to 9.1 percent in 2010.

The OECD forecasts for China’s economic growth are higher than World Bank estimates, also released today, of 7.5 percent in 2009 and 9.4 percent this year.

To contact the reporter on this story: Nipa Piboontanasawat in Hong Kong at npiboontanas@bloomberg.net