China May Delay Monetary Tightening as Exports, New Loans Drop

By Bloomberg News

Aug. 12 (Bloomberg) -- The People’s Bank of China may delay tightening monetary policy until the fourth quarter after exports dropped in July, lending fell and investment growth slowed, economists said.

Exports fell 23 percent from a year earlier, the government said yesterday. Urban fixed-asset investment rose a less-than- estimated 32.9 percent in the first seven months from a year earlier. New loans plunged to 355.9 billion yuan ($52 billion), less than a quarter of advances in June.

China’s economy, which avoided following the U.S. and Europe into recession, is yet to cement a recovery because factories have too much capacity and exports are weakening, officials said this month. The Shanghai Composite Index rose 0.5 percent yesterday, snapping a four-day slide, as investors speculated that the government will refrain from reducing capital inflows.

“The slightly weaker-than-expected data means an even smaller chance of an imminent change in macro policy and lends weight to those who argue that it is too early to tighten,” said Stephen Green, head of China research at Standard Chartered Bank in Shanghai. “What was a V-shaped recovery now seems to be experiencing a little gravitational pull.”

Consumer prices will start to rise again in November, helping to trigger a shift in monetary policy, with banks’ reserve requirements rising in the fourth quarter, an interest- rate increase in the first half of next year, and “even possibly loan quotas,” Green said.

Intel, General Motors

Prices slid 1.8 percent in July from a year earlier, the biggest decline since 1999, yesterday’s data showed.

Government efforts to create jobs and stoke growth with a 4 trillion yuan stimulus package are helping the sales of companies from Intel Corp. to construction equipment-maker Komatsu Ltd. General Motors Co. reported a 78 percent increase in vehicle sales in China in July.

Retail sales rose 15.2 percent in July, more than economists forecast, the statistics bureau said yesterday.

The People’s Bank of China scrapped lending quotas in November, triggering a record 7.73 trillion yuan ($1.3 trillion) of new loans this year. M2, the broadest measure of money supply, rose 28.4 percent in July from a year earlier, yesterday’s data showed.

The central bank also slashed reserve requirements and interest rates in the final four months of last year, as the global credit crisis deepened after the collapse of Lehman Brothers Holdings Inc. The reserve ratio is 15.5 percent for big banks and 13.5 percent for small lenders. The key one-year lending rate is 5.31 percent.

Property, Stock Bubbles

Shanghai’s stock index has rallied almost 80 percent in 2009 and real-estate sales and prices have rebounded, adding to concern that asset bubbles may hamper the recovery.

China’s stock market performance is closely tracking “local perception” of monetary policy, said Howard Wang, head of the Greater China team at JF Asset Management, which oversees $50 billion. Falling exports “comfort the local market” by adding to signs that the government will not tighten policy, Wang said.

Industrial output grew 10.8 percent in July from a year earlier. That compared with a 10.7 percent advance in June and economists’ median forecast for an 11.5 percent increase.

China’s government may end the current “extremely loose” monetary policy in the fourth quarter, when the recovery is on a stronger footing, said Helen Qiao, a Hong Kong-based economist for Goldman Sachs Group Inc.

Global Weakness

The tools may include a 50 basis-point increase in banks’ reserve requirements, higher money market rates and more government guidance of lending, Qiao said.

Goldman this week raised its forecast for China’s gross domestic product growth this year to 9.4 percent, noting that weakness in the global economy would deter policy makers from tightening too soon.

Premier Wen Jiabao reaffirmed Aug. 9 that China will maintain a “moderately loose” monetary policy and “proactive” fiscal stance.

The central bank stepped up bill sales from July to mop up liquidity and the banking regulator has increased checks to ensure that lending flows into the real economy, rather than speculation. China Construction Bank Corp. President Zhang Jianguo said last week that the nation’s second-largest bank will cut new lending in the second half by about 70 percent to avert a surge in bad debt.

China’s economy expanded 7.9 percent in the second quarter from a year earlier, rebounding from the weakest growth in almost a decade.

To contact the Bloomberg News staff on this story: Kevin Hamlin in Beijing on khamlin@bloomberg.net;