China May Spur Consumer Spending After Lowering Rates

By Li Yanping and Kevin Hamlin

Dec. 23 (Bloomberg) -- China may follow its latest interest- rate cut with steps to spur consumer spending as deepening recessions in the U.S. and Europe pummel exports, one of the main engines of the world's fourth-largest economy.

The People's Bank of China yesterday lowered its one-year lending rate by 0.27 percentage point to 5.31 percent and the deposit rate by the same amount to 2.25 percent. The central bank also reduced the proportion of deposits lenders must set aside as reserves by 0.5 percentage point.

Chinese stocks fell on concern the cut was too small to shore up the economy, which may grow at the slowest pace in two decades next year. Premier Wen Jiabao, who unveiled a 4 trillion yuan ($583 billion) stimulus package for roads and bridges last month, may also reduce taxes and try to prop up the housing market, economists said.

Officials “will continue to ease monetary policy and introduce additional fiscal stimulus measures, particularly in support of domestic consumption,” said Jing Ulrich, head of China equities at JPMorgan Chase & Co. in Hong Kong.

The CSI 300 Index of stocks declined 2.1 percent at 10:35 a.m. in Shanghai, extending its annual decline to 63 percent. The yuan traded at 6.8515 per dollar, little changed from 6.8510 yesterday. After a 6.6 percent advance in the first half of the year, the currency's gains stalled in the second half.

Stimulus Package

Stocks have fallen this year partly on concern that China's economic slowdown may deepen before the government's stimulus plan kicks in next year. Hong Kong-based CFC Seymour Ltd. forecasts growth of as little as 4 percent in the second quarter of 2009, about half the pace of the three months to Sept. 30 this year.

In 2005, China vaulted past the U.K. to become the world's fourth-largest economy, after its expansion averaged 9.9 percent annually for the previous 30 years. Gross domestic product has increased 69-fold since Deng Xiaoping began free market changes in 1978. China accounted for 27 percent of global growth last year.

Central banks worldwide are cutting rates to spur growth. The Bank of Japan reduced its benchmark rate to 0.1 percent from 0.3 percent on Dec. 19, three days after the U.S. Federal Reserve lowered its main interest rate to as low as zero. Hungary's central bank cut its key interest rate by half a percentage point to 10 percent yesterday.

Europe, U.S.

“We're still expecting an awful economic performance out of Europe and the U.S. in the first half of next year,” said Mark Williams, an economist at Capital Economics Ltd. in London. “That's got to weigh on China.”

Growth in the world's fourth-largest economy is slowing as recessions in the U.S. and Europe stem demand. China's exports fell for the first time in seven years in November, imports plunged and output contracted by a record.

“The country's economic slowdown is still accelerating,” said Qu Hongbin, chief economist at HSBC Holdings Plc in Hong Kong, who forecasts more rate cuts in the first quarter of next year.

Fu Ziying, China's vice trade minister, said last week the plight of the nation's exporters is worsening because some overseas buyers are defaulting on payments as they grow short of cash amid a global credit crunch.

China needs to rebalance its economy so that consumption and services become the main drivers of growth instead of investments and exports, the World Bank said last month.

Deficit Can Widen

To fund measures to boost consumption, the government can sustain a deficit of as much as 900 billion yuan next year, widening from this year's shortfall of 180 billion yuan, according to Xing Ziqiang, an economist at China International Capital Corp. in Beijing.

One area the government is targeting is the property market: Home transactions fell 21 percent in the first 11 months of 2008. China this week gave local governments more power to support the real estate market and pledged to build 1.3 million homes for low-income families over the next two years. Last week the State Council lowered home transaction taxes.

Measures to support consumption are also necessary as unemployment in the world's most populous nation rises.

In 2008 more than 10 million migrant workers had lost their jobs as of the end of November, Caijing Magazine reported Dec. 17, citing an unidentified labor ministry official. Uniden Corp., a Japanese maker of wireless communication gear including cordless phones, said this month it will eliminate 6,200 jobs in China.

The People's Bank of China's rate cuts yesterday were smaller than expected, according to economists at Daiwa Institute of Research, HSBC Holdings and Capital Economics. Further reductions are expected after the New Year, the economists said.

“We expect another 27 basis-point cut within the next few weeks and at least a further 54 basis points by the end of the second quarter of 2009,” said Williams of Capital Economics. “However, it is fiscal policy that matters now.”

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