China Will Likely Limit Stimulus in Any Global Slump, Deutsche Bank Says

By Paul Panckhurst and Sophie Leung - Sep 19, 2011 3:17 PM GMT+0700

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China’s government is wrestling with elevated inflation and the threat of a deeper economic slowdown because of the debt crisis in Europe, the nation’s biggest export market, and weakness in the U.S. economy. Photographer: Stefen Chow/Bloomberg

China’s stimulus in any world economic slump is unlikely to be more than half the nation’s estimated 9.3 trillion yuan ($1.46 trillion) fiscal and monetary expansion from November 2008 through 2010, Deutsche Bank AG said.

While highly speculative, a sketch of the government’s possible response is emerging from “our discussions in China,” Hong Kong-based economist Ma Jun said in a note dated Sept. 16. The government would limit any measures because of the costs associated with the previous package, including asset bubbles, inflation and non-performing loans, Ma said.

China’s government is wrestling with elevated inflation and the threat of a deeper economic slowdown because of the debt crisis in Europe, the nation’s biggest export market, and weakness in the U.S. economy. Deutsche forecasts that China’s growth may cool to 7.3 percent in the first quarter of next year compared with 9.5 percent in the second quarter of 2011.

The Shanghai Composite Index fell 1.4 percent as of the 11:30 a.m. local-time break in trading, set for the lowest close in 14 months.

Stimulus measures would mostly be fiscal rather than monetary, Ma added. Efforts to boost consumption could include consumer vouchers, subsidies for consumer goods, temporary cuts in fees for electricity and water, and temporary tax breaks for small businesses.

Housing, Agriculture

The government could allocate more investment to public housing and “long neglected” agricultural infrastructure, Ma said. He said that 40,000 dams, or about 45 percent of the total, are in need of repair. The labor-intensive services sector could be used to absorb workers from export industries, he said.

Wu Xiaoling, a former deputy central bank governor, said that the government shouldn’t expand monetary or fiscal stimulus because of price pressures and central and local- government debt. Her comments were published today by the Financial News, the central bank’s newspaper.

Wu said China’s economy is highly likely to slow next year.

To contact the reporters on this story: Paul Panckhurst in Beijing at ppanckhurst@bloomberg.net; Sophie Leung in Hong Kong at sleung59@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net