China Forecaster Sees No Sudden Ease

By Bloomberg News - Oct 19, 2011 10:06 AM GMT+0700

China, facing a hit to exports from Europe’s debt crisis, may refrain from cutting interest rates this year as inflation stays above target and domestic spending supports growth in the engine of the global recovery.

Industrial output and retail sales rose at a faster pace in September even as the economic expansion cooled to 9.1 percent in the third quarter, a report released in Beijing yesterday showed. Consumer prices climbed 6.1 percent, exceeding a 4 percent target, a release showed last week.

“The latest data won’t trigger any sudden change in monetary or fiscal policy, but looking ahead the overall direction is likely to be easing,” said Yao Wei, the only one of 22 economists in a Bloomberg News survey to predict the GDP number. “Consumption has held up quite well,” said Yao, a Hong Kong-based economist for Societe Generale SA.

Economists predict targeted measures to support growth as Europe’s crisis clouds the outlook for exports and small companies in China complain of a funding squeeze. The central bank will keep rates on hold for the rest of the year, while “selective easing” may include ensuring funding for small and medium-sized companies and a government housing program, JPMorgan Chase & Co. (JPM) said.

The Shanghai Composite Index was up 0.3 percent as of 11:02 a.m. local time. The measure has fallen about 15 percent this year on concern that tightening measures will trigger a slowdown. The yuan was little changed at 6.3798 per dollar.

Xia Bin’s View

Central bank adviser Xia Bin said in an interview in Beijing today that the nation’s growth is “sound” and he doesn’t believe that the government needs to implement “major” stimulus measures.

The gain in gross domestic product reported by the statistics bureau was lower than the median 9.3 percent forecast in a Bloomberg News survey. It was also the third straight deceleration and the smallest increase in two years.

A halving of growth in shipments to the European Union in September underscored the threat that weaker demand poses for the world’s biggest exporting nation. Exports were the equivalent of 27 percent of gross domestic product in 2010.

The outlook for trade this quarter and in the first three months of next year is “grim,” Shen Danyang, a spokesman for China’s Ministry of Commerce, said at a briefing in Beijing today.

Five interest-rate increases since mid-October last year, elevated reserve requirements for banks and curbs on investment in housing have also cooled the economy.

Lending Risks

Investors are concerned about bad-debt risks for banks and the ability of local governments to repay money borrowed for infrastructure projects. China Business News reported yesterday that rail projects have been halted due to cash shortages and the People’s Daily reported that some road building has stalled for the same reason.

“Fiscal tweaks and targeted support for SMEs should help China avoid a hard landing, making an across-board easing in monetary policy unlikely in the immediate future,” said Qu Hongbin, a Hong Kong-based economist with HSBC Holdings Plc. (HSBA) The “strength of domestic demand” will help to sustain the expansion even as weakness in overseas markets takes a “bite” out of exports, Qu said.

Asian Response

Across Asia, governments have been shielding their economies, with Indonesia cutting interest rates, the Philippines announcing a stimulus package and Singapore easing monetary policy by slowing currency gains. Weighing against a loosening of monetary policy in China is the 13 percent jump in food prices in September that highlighted that the nation has yet to tame inflation.

China’s retail sales rose 17.7 percent in September, topping the 17 percent pace that was economists’ median estimate and also the reported level in August. Signs that Chinese shoppers are not letting up include Hengdeli Holdings Ltd. (3389), the retail partner of Swatch Group AG (UHR), reporting a jump in sales during this month’s Golden Week public holiday.

Gains in consumption help shift China away from dependence on exports and investment, a move sought by the Chinese government and members of the Group of 20 nations aiming to rebalance the world economy for more stable growth.

Industrial output grew 13.8 percent in September, yesterday’s data showed, higher than a median estimate of 13.4 percent and August’s 13.5 percent increase.

Investment Growth

Fixed-asset investment excluding rural households climbed 24.9 percent in the first nine months, the statistics bureau report said. That compared with the 24.8 percent median estimate and a 25 percent gain through August.

The People’s Bank of China has paused in raising interest rates since a July increase that took benchmark one-year borrowing costs to 6.56 percent and deposit rates to 3.5 percent. The last publicly announced increased in bank reserve requirements, in June, took the level for the biggest lenders to a record 21.5 percent.

UBS AG said yesterday that there will be “no major policy easing until early 2012, but liquidity conditions may be fine- tuned and eased selectively.” Reserve requirements may also be cut if inflows of foreign-exchange are limited, said Wang Tao, a Hong Kong-based economist for the bank.

‘Small Stimulus’

According to UBS, China may use a “small stimulus,” equivalent to about 2 percent of gross domestic product, to spur growth, with that easing of fiscal and credit policy coming at the government’s December economic work conference or, more likely, at the start of next year. Based on last year’s total for gross domestic product, that calculation indicates measures amounting to about 800 billion yuan ($125 billion).

Signs the government is prepared to offer support to some areas of the economy emerged last week when the State Council unveiled tax breaks and financial support for small businesses after complaints of a credit squeeze and increased reliance on so-called underground lenders.

Any “outright easing of monetary policy will have to wait until inflation expectations stabilize and external demand falls sharply,” said Liu Li-Gang, an economist at Australia & New Zealand Banking Group Ltd. (ANZ) in Hong Kong. He said that “partial easing” could include reducing reserve requirements for small and medium-sized banks.

China’s economy grew 2.3 percent in the third quarter from the previous three months, seasonally adjusted, the statistics bureau said yesterday. That compared with a revised 2.4 percent gain for the second quarter.

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