THE PEOPLE’S BANK of China has reportedly injected some 500 billion yuan into the five biggest commercial banks in the form of short-term low-interest loans. This can best be regarded as a targeted monetary easing to perk up an economy at risk of falling short of its official target of 7.5% annual growth following a run of soft monthly economic indicators. Four months of a weakening property market, in particular, has culminated in noticeable economic sluggishness since mid-August.
Taking such action ahead of the October national day holiday, during which the banks traditionally face high cash withdrawals, gives the central bank a fig leaf from behind which to claim, should it be of a mind to explain its motives, that it is not indulging in old-school stimulus. Much of the new loans is likely to end up in the real estate sector and funding new infrastructure, however, and thus lay down more speed bumps along the road to rebalancing the economy.
CHINA’S SECOND-QUARTER growth came in at a slightly better-than-expected 7.5%. That is 0.1 percentage points up on the first quarter. Thank a series of targeted stimulus measures for that. Both retail sales and industrial production rose in the quarter.
With the stimulus effects likely to carry over to the third quarter, the official target of 7.5% GDP growth for the full year is back on track. Additional stimulus is unlikely for now except in the slowest growing provinces, where local authorities are still spending heavily, old school.
Low inflation leaves Beijing with some monetary policy flexibility, but cutting interest rates or banks’ reserve requirements to help business get more credit has to be balanced against reigniting asset prices, particularly property.
So far China’s new leadership has resisted short-term fixes to the country’s slower growth and held true to the need for deeper structural reforms to rebalance the economy. The latest measure of economic activity — HSBC’s flash purchasing managers’ index for May — may test their resolve, but not, this Bystander hazards, break it.
The May reading, at 49.6, down from April’s 50.4, was the lowest in seven months. More germanely, it fell below the 50 mark that delineates expansion from contraction. The modest expansion of manufacturing activity that has been seen since the slowing economy started to pick up steam again last autumn has been replaced by modest contraction. The second area of concern is that the weakness seen by China’s manufacturers in global demand for their goods and services seems to have spread to their domestic customers.
The difficulty for policymakers is that they have limited scope even for short-term fixes. Monetary policy is already easy and loosening it further or splashing out on another round of government funded infrastructure investment spending risks further inflating property bubbles and an already concerning local government debt overhang. At best there is likely to be spot stimulus measures applied where local employment conditions put social stability at risk.
One of the vehicles for this might be the new leadership’s urbanization plans, a centerpiece of its long-term management of moving China to a slower growth trajectory than the double digit annual growth it averaged over the past three decades. While the plan will take years to implement, it could set a tone for structural reform that would have a more immediate effect on economic confidence, and prevent GDP growth for the year falling below 2012’s 7.8%, its slowest in more than a decade.
Economic activity remains weak in China. April’s industrial output was up 9.3% in April from March’s 8.9%, a seven-month low, but short of expectations of 9.5% growth. The recovery that started in the second half of last year is not gathering any momentum. Second-quarter growth is on track to be little better than the first quarter’s 7.7%, and likely less than 8%.
That is testing policymakers’ patience. They would like to stimulate short-term growth, but are already running loose monetary policy. Any further loosening risks pushing up consumer prices and further inflating asset bubbles, particularly property prices. Meanwhile, state-led infrastructure construction spending, which has been a big driver of growth since the 2008 global financial crisis, is running out of steam and effectiveness, and the debt overhang, as much as 20 trillion yuan ($3.25 trillion), is a worry in Beijing.
The temptation, particularly for provincial and local officials, is to fall back on the tried and trusted remedy to provide a short-term boost to growth, but that also delays the necessary long-term rebalancing of the economy to which the new leadership repeatedly says it is committed. For now, policy makers are likely to stay their course, but they badly need some growth to steady their nerves. With the global economy sluggish, that is more out of their hands than they would like.
China’s economy grew more slowly in the first quarter of this year than it did in the fourth quarter of last — 7.7% year on year against 7.9%. The consensus among economists had been that the recovery from last year’s slowdown would continue into the first quarter, albeit modestly, but not ease back.
It was industrial production that was the weak spot. Fixed asset and real estate investment both ran at 20% above the same quarter the previous year. Absent the weakness in industrial output, that might have tempted policy makers to tighten monetary policy to cool off the property market. This Bystander would now expect the central bank to hold fire on that while it sees if the recovery picks up again in the second quarter.
This Bystander is not as surprised as some to see the December HSBC Purchasing Managers’ Index for December showing further expansion of China’s economy. Infrastructure spending and cautiously easier monetary policy have been visibly kicking in since September.
The final reading of the December HSBC PMI was 51.5, compared to a preliminary reading mid-month of 50.9 and November’s 50.5. A reading above 50 indicates expansion. Domestic demand is making up for sluggish overseas markets; the new export orders sub-index for December fell to 49.2 from November’s 52.1. That manufacturing is growing at its fastest pace since May 2011–and the official PMI due tomorrow will tell much the same story–will give policymakers in Beijing good reason to believe that the momentum of an accelerating pace of expansion can be carried into 2013.
How far and how fast will they let it run? The People’s Bank of China on Saturday flagged the risk of defaults in the shadow banking system. Inflation, a persistent concern, is beginning to edge up again. If either concern is present beyond the first quarter of 2013, some tightening is likely to start.
China’s annual two-day closed door economic policy-setting conference has concluded with a cautious weather eye again being cast to the squalls of the global economy next year. Policy will be kept as is, not unexpectedly, but with room for maneuver in both fiscal and monetary policy reserved should the global economy deteriorate.
Rising protectionism, inflation and asset bubbles are listed as the main risks along with the longer running lack of demand in China’s export markets in the rich countries. Beijing will target 7.5% GDP growth for 2013, the same as this year. Monetary policy will remain modestly expansive, with a hand being kept on the bank lending and public spending taps ready to open or close them a turn as necessary. Property controls will remain and the yuan held steady.
The conference seems to have said all the right things about economic reform. The country will push forward with the next stage of economic reforms “with greater political courage and wisdom,” state media reported. That, though, is more difficult to deliver than economic targets.