China Signals Growth Concern in Credit Boost

By Bloomberg News - Nov 24, 2011 1:59 PM GMT+0700

China widened efforts to support cash-strapped companies in Zhejiang and rural areas hit by a credit squeeze that’s slowing the second-largest economy just as Europe’s debt crisis saps export demand.

The People’s Bank of China cut the reserve ratio for more than 20 rural credit cooperatives nationwide by half a percentage point, according to an announcement from its Hangzhou branch in Zhejiang, where small businesses have complained about lack of access to credit. Bank of America Merrill Lynch predicts officials will lower the ratio for large commercial banks early in 2012.

Evidence is mounting that growth has moderated in the economy that’s led the global expansion, with home sales falling 25 percent last month and a report yesterday signaling manufacturing may shrink the most in almost three years. Premier Wen Jiabao has pledged to “fine tune” policy as needed.

“The unexpectedly sharp drop in China’s flash PMI for November, if corroborated by other indicators, is likely to push policy makers to go beyond policy ‘fine-tuning’ to outright easing,” said Mark Williams, a London-based Asia economist at Capital Economics Ltd. “Confirmation that the People’s Bank has lowered reserve requirements for some banks is likely to be only the start.”

The “flash” reading for the manufacturing PMI reported by HSBC Holdings Plc and Markit Economics yesterday was 48, under the 50 level that’s the border between expansion and contraction.

Stocks Retreat

The MSCI Asia Pacific Index was down 0.4 percent at 3:58 p.m. Tokyo time after Standard and Poor’s said that Japanese Prime Minister Yoshihiko Noda’s administration hasn’t made progress in tackling the public debt burden. That may indicate that the ratings company is preparing to lower the nation’s sovereign grade, at AA- with a negative outlook since April.

“Japan’s finances are getting worse and worse every day, every second,” Takahira Ogawa, director of sovereign ratings at S&P in Singapore, said in an interview.

A German government debt auction overnight stoked concern that an untrammeled European crisis will impair the global recovery. Investors failed to bid for 35 percent of the securities on offer from Germany, the largest economy in Europe.

Elsewhere in Asia, Hong Kong is scheduled to report October trade figures today, and Taiwan releases its second estimate for gross domestic product in the third quarter, previously calculated at a 3.37 percent year-on-year gain.

Belgium, Brazil

Belgium, considered a bellwether for the western European economy, may report business confidence slid in November to its lowest level since 2009, when the global economy was pulling out of the recession caused by the American mortgage-market collapse. Brazil may report its unemployment rate fell to 5.9 percent in October, according to the median estimate in a Bloomberg News survey, signaling sustained growth in emerging markets.

The Chinese central bank’s move yesterday reduces the percentage of deposits the cooperatives are required to park with the central bank to 16 percent, a “normalization” after an increase a year ago, the Hangzhou branch said in its statement yesterday. The extra 0.5 percentage point requirement had penalized lenders that failed to meet lending targets in rural areas, and was imposed after a check carried out each November, it said.

In another sign of China’s shift, the central bank on Nov. 11 said local-currency lending was 586.8 billion yuan ($92 billion) in October, exceeding September’s 470 billion yuan and higher than the 500 billion yuan median estimate in a Bloomberg News survey.

Injecting Liquidity

The PBOC has also injected greater liquidity into the market for loans between banks, through open market operations that have depressed interbank rates, Goldman Sachs Group Inc. economists wrote in a note to clients last week. Further tools will include a slower pace of currency appreciation and looser fiscal policy, Goldman analysts said.

Policy makers may have to cut the reserve ratio for commercial banks if financial institutions’ yuan positions decline further the rest of the year, said Wang Tao, a Beijing- based economist at UBS AG.

Financial institutions’ yuan positions, accumulated from central bank purchases of their foreign exchange, fell 24.9 billion yuan in October, a PBOC report showed this week. The measure is an indication of capital flows.

Credit Squeeze

The central bank said in yesterday’s statement that it will continue to implement prudent monetary policy, promote “reasonable growth” in credit and money supply, and guide financial institutions to increase support to rural areas and small companies.

The city of Wenzhou in Zhejiang has been the focus of complaints by small businesses that they face a credit squeeze after the government tightened monetary policy to cool inflation and the property market. More than 80 businessmen in Wenzhou have disappeared, committed suicide or declared bankruptcy to avoid repaying debts to informal lenders since April, the state- run Xinhua News Agency reported in September.

Wenzhou’s 400,000 businesses are facing financial hardship because of rising costs, soaring black market interest rates and a sudden credit squeeze, according to Zhou Dewen, head of a small business association in Wenzhou. Similar problems are happening across China because private enterprises rely on underground borrowing rather than banks to operate, he said.

National and local leaders have since announced moves to help small firms, including offering easier access to bank loans, a cap on private-lending interest rates in Wenzhou and a crackdown on loan sharks that use violence.

Meanwhile, Europe’s sovereign-debt woes threaten to undermine exports, which rose the least in almost two years in October, and evidence of a weakening property market may slow domestic demand.

To contact Bloomberg News staff for this story: Victoria Ruan in Beijing at vruan1@bloomberg.net

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