China to Take More Measures to Revive Economic Growth

By Li Yanping

Nov. 17 (Bloomberg) -- China, spending 4 trillion yuan ($586 billion) on a stimulus plan, may take ``preemptive'' measures to revive growth as the financial crisis increasingly takes its toll on the economy, the central bank said.

The People's Bank of China will be flexible and has ``ample room'' for policy changes, it said today in its quarterly monetary policy report posted on its Web site. It will ensure money supply liquidity, the bank said.

``The global financial markets are in severe turbulence, world economies are seriously shocked and the negative impact on China is emerging and intensifying,'' the bank said. The impact on China ``shouldn't be underestimated.''

China's economy grew at its slowest pace in five years in the third quarter, and its October industrial production and trade figures suggested the slowdown was deepening. The government unveiled the stimulus package on Nov. 9, and shifted to a ``moderately loose'' monetary policy.

``As capital inflows decrease amid the financial crisis, the central bank is worried about liquidity in the financial system,'' Xing Ziqiang, an economist at China International Capital Corp., said in Beijing. The central bank may cut reserve ratios for banks by the end of this year and also trim lending rates further, he said.

China's central bank has cut interest rates three times since September and removed controls on bank lending to support small businesses and fund the building of railways, airports and roads. It didn't specify what measures it may take to bolster the world's fourth-largest economy in today's statement.

`Contingency Plans'

China has ``various contingency plans,'' the bank said, adding that it will ensure sufficient liquidity in the financial markets by reducing open market operations and increasing fund supply.

The government may take more measures to boost domestic consumption, expand fixed-asset investment, and increase spending, the central bank said.

The weakening property markets may drag down growth and plunging stocks are trimming households' income, adding to the downside risks of China's growth just as the world economic slowdown slashes exports, the central bank said.

House prices grew at the slowest pace in more than three years in October, government data showed. Sales by volume fell 55.5 percent and 38.5 percent in Beijing and Shanghai in the first eight months from a year earlier, according to state media.

The nation's stock benchmark CSI 300 Index has dropped 63 percent this year.

Housing Market

Measures should also be taken to ensure ``rational'' investment in real estate which is key to spurring consumption of steel, raw materials, appliances and to the health of the financial industry, the central bank said.

The central bank previously ratcheted up benchmark interest rates and imposed quotas on how much banks can lend to fight inflation that climbed to a 12-month high in February. Inflation has since halved.

China faces deflationary pressure in the short-term after the rate of inflation slowed for six consecutive months, the central bank said today.

Still, capital injections by central banks worldwide and expected future increases in China's labor and energy prices may lead to inflationary pressure over a long-term, the bank said.

To contact the reporters on this story: Li Yanping in Beijing at yli16@bloomberg.net