Stance shift sees China ease monetary policy

By Jamil Anderlini in Beijing

Beijing has kicked off a new round of monetary loosening after more than two years of progressively tighter policies by cutting the proportion of deposits that banks must hold in reserve with the central bank.

The 0.5 percentage point cut in the reserve ratio for all banks announced on Wednesday “is a signal not only that policymakers are loosening but that they want to be seen to be doing so,” said Mark Williams, chief Asia economist at Capital Economics. “We see this as a decisive shift in policy stance from China.”

The move shows Beijing believes it has finally beaten stubbornly high inflation that peaked at an annualised 6.5 per cent in July and is predicted to have fallen well below 5 per cent in November.

But it also reveals growing concern about a slowdown in the world’s second-largest economy and suggests that policymakers, who were not expected to start loosening until next year, are much more concerned about growth than previously thought.

China’s quarterly gross domestic product data have so far shown only a mild deceleration, from 9.5 per cent annual growth in the second quarter to 9.1 per cent in the third – a still enviable rate by any standards.

But other indicators of economic activity have started to sketch a more worrying picture and many analysts are now warning that growth is about to surprise on the downside in the coming months.

“The slowdown has been gradual and modest so far but in the next couple of quarters we expect things will get a lot worse,” said Wang Tao, an economist at UBS. “We predict GDP growth will drop to 7.7 per cent year-on-year in the first quarter and just 6 per cent quarter-on-quarter. That will be the lowest level since the fourth quarter of 2008 and a very steep slowdown.”

Forecasts like this have started to proliferate and they are based on a range of proxy indicators that show growth is already faltering in some sectors.

Seaport cargo volumes, domestic freight volumes, electricity output, passenger trips and housing construction have all cooled off following high rates of growth earlier in the year.

The falls have been most noticeable in electricity output growth, in manufacturing activity and in passenger trips – a good indicator of business travel and discretionary household spending.

China’s official purchasing manager’s index is scheduled for release on Thursday and is expected to have fallen below 50 in November, indicating contraction rather than expansion in the manufacturing sector.

An alternative “flash” PMI published by HSBC last week showed a steep drop for the first three weeks of November, falling from October’s reading of 51 to just 48, the lowest level since March 2009.

While seaborne freight from China has held up relatively well so far, that is not expected to continue given the gloomy outlook in Europe and the US, China’s two largest trading partners.

Export growth has remained relatively robust in recent months but some analysts expect a dramatic slowdown in the next month or two.

Chinese exports expanded 16 per cent in October from a year earlier but Mr Williams at Capital Economics expects growth to drop to less than 10 per cent in November and to fall further.

Of all the concerns about Chinese growth that are starting to emerge, none is more worrying than the prospect of a collapse in the real estate market.

The government has been trying to engineer a small correction in housing prices for most of the last two years but a crash in real estate would be devastating for the overall economy because so much of the country’s growth relies on housing construction.

Sales volumes have fallen significantly across the country and prices are beginning to slide in major cities. Although construction is still growing at an annual rate of above 30 per cent, developers seem to have mostly called a halt to new projects.

Despite the numerous indications that growth is slowing more than expected in the world’s main economic engine, some experts warn this may not be immediately apparent in the country’s headline statistics, partly due to regional misreporting, and the difficulties of collating accurate data in such a large country.

In a speech two weeks ago, Lu Mai, a top government economist, said China’s official GDP figures had not fully reflected the extent of previous economic downturns in the 1998 Asian financial crisis and again in the global panic of 2008. He warned the problem was likely to arise again during the current slowdown and suggested observers should watch other indicators more closely.


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