China’s Falling Exports, Loans Signal Stimulus Needed

By Bloomberg News

Aug. 11 (Bloomberg) -- China’s exports and new loans tumbled in July and industrial output rose less than estimates, underscoring government concern that the world’s third-biggest economy is yet to establish a solid recovery.

Exports fell 23 percent from a year earlier, the customs bureau said. Industrial production gained 10.8 percent, the statistics bureau reported. New loans plunged to 355.9 billion yuan ($52 billion), less than a quarter of June’s level, the central bank said.

China will maintain a “moderately loose” monetary policy and “proactive” fiscal stance to bolster domestic spending in the face of slumping exports, Premier Wen Jiabao said Aug. 9. New loans fell as the government and banks moved to avert bad debt and bubbles in stocks and property after a record $1.1 trillion of lending in the first half helped drive a 7.9 percent economic expansion in the second quarter.

“There’s an element of fragility in the recovery,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale in Hong Kong. “The government needs an appropriately loose monetary policy.”

The yen rose against the euro and the dollar as investors sought safety because of the weaker-than-estimated output number and the export decline. The Shanghai Composite Index closed 0.5 percent higher, taking this year’s increase to 79 percent. Appliance manufacturer Qingdao Haier Co. and spirits maker Kweichow Moutai Co. climbed as the statistics bureau said retail sales rose 15.2 percent, more than estimates.

Topping Growth Target

China’s economy will grow 9.4 percent this year, topping the government’s 8 percent target, Goldman Sachs Group Inc. said yesterday. The credit boom and a 4 trillion yuan stimulus package helped General Motors Co. to report a 78 percent increase in vehicle sales in China in July.

Urban fixed-asset investment for the seven months to July 31 climbed 32.9 percent, the statistics bureau said. That was less than a 33.6 percent gain through June and the 34 percent median estimate in a survey of 22 economists.

“The fixed-asset investment number is worrying because government-sponsored investment is a pillar of the recovery,” said Tao Dong, chief Asia-Pacific economist at Credit Suisse AG in Hong Kong. “This set of data should postpone any thought of more aggressive tightening; the economy is slowing down a little bit.”

Solid Foundations

Policy makers cautioned this month that a recovery is not yet on solid foundations and central bank Governor Zhou Xiaochuan said July 28 that the nation will take its cue from the U.S. on when to end economic rescue efforts.

The Bank of Japan left its key lending rate unchanged today, citing “downside risks to economic activity” and South Korea held its benchmark at a record low, with Governor Lee Seong Tae saying a recovery faces “some uncertainties.”

The gain in industrial production in China compared with a 10.7 percent advance in June and economists’ median forecast for an 11.5 percent increase.

The export decline matched economists’ estimates and was the third biggest since China’s shipments began to shrink in November last year. China Shipping Container Lines Co., the country’s second-largest carrier of sea-cargo boxes, forecast last month a first-half loss on weaker global demand.

Imports fell 14.9 percent, leaving a trade surplus of $10.63 billion.

‘Modest Disappointment’

The industrial production figure suggested the economy “started the third quarter on a slightly softer tone,” Ben Simpfendorfer, a Hong Kong-based economist for Royal Bank of Scotland Plc, said in a Bloomberg Television interview. “It’s a modest disappointment.”

July’s new loans were the least since the government dropped quotas limiting lending in November last year and pressed banks to support a 4 trillion yuan stimulus package. None of 11 economists surveyed forecast such a low number. M2, the broadest measure of money supply, rose 28.4 percent.

Loans growth was in keeping with the moderately-loose monetary policy, the state-run Xinhua News Agency quoted an unidentified central bank official as saying in a report on a government Web site.

New loans are usually higher in the first half of the year and in March, June and September, the official said.

China Construction Bank

China Construction Bank Corp., the nation’s second-largest bank, will cut new lending by about 70 percent in the second half to avert a surge in bad debt, President Zhang Jianguo said last week.

“We noticed that some loans didn’t go into the real economy,” Zhang, 54, said in an Aug. 6 interview at the bank’s headquarters in Beijing. “I feel that some industries are expanding too rapidly. For example, housing prices are rising too fast, and housing sales are growing too fast.”

UBS AG said in a July 31 note that the scale of China’s new lending in the first half was “neither sustainable nor necessary.” New loans of 300 billion yuan to 400 billion yuan a month in the second half would be “more than enough” to support the nation’s recovery, the report said.

Consumer prices fell 1.8 percent last month from a year earlier, the biggest decline since 1999, the statistics bureau said today. They were unchanged from the previous month. Producer prices dropped a record 8.2 percent.

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