Tags: china | growth | wen | stimulus

Wen’s Growth Pledge Spurs Speculation China to Boost Stimulus

Monday, 21 May 2012 12:39 PM

Chinese Premier Wen Jiabao’s pledge to focus more on bolstering growth spurred speculation the government will step up efforts to combat a slowdown in the world’s second-largest economy.

Wen called for “putting stabilizing growth in a more important position” and didn’t mention inflation in remarks published yesterday by the official Xinhua News Agency. China may announce stimulus actions in the near term, according to a front-page commentary today in the China Securities Journal, which is published by Xinhua.

The shift in language suggests authorities are “seriously concerned about growth” and “ready to introduce further measures,” Bank of America Corp. said in a research note today. The government on May 12 cut banks’ required reserves for the third time in six months following data showing trade, industrial production and lending were below forecasts in April.

“Joint efforts of monetary, fiscal and industrial policies are needed to stabilize growth before the leadership transition this fall,” Citigroup Inc. economists including Shen Minggao in Hong Kong said in a research note late yesterday.

The ruling Communist Party is preparing for a once-per- decade transition later this year to a younger generation of leaders, with Wen likely to be replaced with Vice Premier Li Keqiang.

Yuan Fluctuations

China has allowed the yuan to weaken this year against the dollar after it strengthened 4.7 percent in 2011. The currency rose 0.06 percent today, the most in a month, to 6.3243 at 11:27 a.m. in Shanghai, following a decline of about 0.5 percent in 2012 through May 18. The MSCI Asia Pacific Index of stocks rose 0.2 percent at 12:28 p.m. in Tokyo.

The Xinhua report on Wen’s weekend visit to Wuhan, the capital of Hubei province, was reposted yesterday on the government’s website, attributing the information to the State Council’s general office.

“The country should properly handle the relationship between maintaining stable and relatively fast growth, adjusting the economic structure and managing inflationary expectations,” Wen said. “We should continue to implement a proactive fiscal policy and a prudent monetary policy, while giving more priority to maintaining growth.”

Current economic operations are generally stable and growth is still within the expected range, but the domestic and external environments are becoming even more complex, Wen said.

‘Insufficient Demand’

The statement separately cited officials from six provinces including Guangdong as saying during a meeting with Wen that “there are prominent problems seen in areas including insufficient demand and falling profits in some industries and companies. The economy is facing increasing downward pressures.”

Tim Condon, chief Asia economist at ING Financial Markets in Singapore, said the central bank will probably cut the benchmark one-year lending rate by 25 basis points once inflation slows to 3 percent, “which we think will be evident in the May or June data.”

Bank of America’s Lu Ting, Hong Kong-based head of Greater China economics, said he expects three reserve-ratio cuts of 50 basis points apiece by year end and that the chance of interest- rate cuts, while still small, has increased with the April data.

Goldman Sachs Group Inc. last week lowered its forecast for China’s 2012 economic growth to 8.1 percent from a previously estimated 8.6 percent, joining similar moves by banks including Citigroup Inc. and UBS AG after April’s data trailed expectations.

Morgan Stanley Forecast

Morgan Stanley today lowered its forecast for China’s growth this year to 8.5 percent from 9 percent. Economists led by Helen Qiao said they expect two interest-rate cuts this year, “zero” appreciation by the yuan against the dollar and expanded capital spending by the government and state-owned companies.

Wen, during a visit to a Wuhan Iron & Steel Group Corp. plant, encouraged officials at the company, one of China’s largest steelmakers, to eliminate excess capacity, innovate and expand market share, according to the statement.

The China Securities Journal commentary said the fiscal deficit should be widened to boost government spending and there is still room to lower banks’ required reserve ratios. The government may adjust export tax rebates and stabilize the yuan exchange rate to bolster exports, according to the piece credited to a reporter named Zhang Zhaohui.

Trade Slowdown

China’s exports and imports in April expanded the least for the month since the global financial crisis. Industrial output rose at the slowest pace since 2009, after the government tightened credit to cool the property market and inflation.

Wen said the central government will boost domestic consumption, “strive hard” to maintain stable foreign trade growth, “stabilize” property controls and increase the supply of ordinary housing.

More signs of weakening demand have emerged as home prices fell in a record number of Chinese cities last month and car dealers posted inventories that foreshadowed deeper price cuts.

The economy may expand at the slowest pace in 13 years in 2012, a Bloomberg News survey showed, with analysts forecasting a further 100 basis-point reduction in the reserve ratio by year-end.

At the same time, the government’s concern about inflation may ease as consumer prices climbed 3.4 percent from a year earlier in April, having slowed from a three-year high of 6.5 percent in July.


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