NEW MONTHLY ECONOMIC indicators confirm the slowing of China’s economy. Growth in retail sales, industrial production and fixed-asset investment all decelerated in October. Nonetheless, central bankers are likely to hold fast against calls for across-the-board stimulus.
A political and an economic reason underpins that view. The first is that old-school pumping of money into the economy that will only flow through to infrastructure investment runs counter to top leadership’s plans to redirect the economy away from investment- and export-led growth to domestic consumption. The People’s Bank of China is a champion of economic reform. It does not wish to be seen to be falling back to the old ways any more than it can help.
The second is that even if it cut interest rates or lowered the banks’ capital reserve requirements, the money freed up is unlikely to find its way to where it could do most good, privately owned small and medium sized businesses. Such businesses don’t have access to the corporate bond market and rely on banks for financing. However, banks have become wary lenders except to the largest and state-owned enterprises that don’t need the money.
The central bank has the room to ease should it choose to do so. Inflation remains subdued, and the economy grew in the third quarter at its slowest rate since the 2008 financial crisis. Against that, the unemployment rate, more closely watched than the GDP number in Beijing these days, is steady. And growth, though slowing, as expected, is not threatening a hard landing.
Targeted stimulus will continue, regardless. The National Development and Reform Commission, the top economic planning agency, has put 21 projects worth $113 billion, including 16 railways and five airports, on the fast track.
The central bank has also quietly been making liquidity available to the banks through its medium-term lending facility. Such loans are a back-door way to push down interest rates without sending an easing signal. It is also three-month money that disappears after that time without also sending a countervailing tightening signal.
The central bank can always roll over the loans after three months should it choose to do so — although by the time they mature the economy may have gotten back on track through the simple expedient of lowering the official GDP target.