China Seen Delaying New Stimulus Hope Fades for More Spurs to Growth as Beijing Waits for Effects of Its Moves
By AARON BACK
BEIJING—After a spate of weak economic data from China, financial markets are anticipating imminent steps to bolster growth in the world's second-largest economy. But there are signals to indicate Beijing may bide its time.
China's Loan Drought Data on China's July industrial production, exports and bank lending, announced Thursday and Friday, all came in lower than expected, triggering widespread calls from private-sector analysts for more loosening measures.
But some observers, including scholars at state think tanks with links to top policy makers, see signs the central bank is being cautious as there is already a lot of monetary stimulus in the pipeline, and say authorities want to give previous interest-rate cuts and other measures more time to take effect.
That means further easing could come more slowly than investors are hoping for.
A bank employee in Hefei, in China's Anhui province, stacks bundles of yuan in a 2009 photo.
In the wake of the disappointing data, many market participants expected that within days the People's Bank of China would cut banks' reserve requirements, freeing up more cash to lend, given the central bank's record of making such moves on Friday evenings and weekends.
A sense of disappointment with the central bank's lack of action over the weekend was palpable in markets Monday, with the Shanghai Composite Index of domestically traded stocks ending down 1.5% at 2136.08.
"We infer that the authorities do not consider the economic threat serious enough to risk another 2009-2010 style stimulus," ING economists said in a note Monday, referring to a large-scale lending spree by state-owned banks to fund infrastructure and other investment. "We fear their cautious approach will produce a hard landing."
A cut in the reserve-requirement ratio is still possible in the near term. Decision-making at the PBOC is opaque and unpredictable, even by the standards of normally secretive central banks. Economists almost universally expect more easing, and the next move could come at any time with no warning.
But there are reasons to think the authorities may hold off on more measures.
"China's current economic situation is not that bad," said Zhu Baoliang, chief economist at the State Information Center under the National Development and Reform Commission, China's top economic planner. There is no need for the central bank to take "overly intensive" moves, especially with a possible rebound in inflation from August, he said.
In fact, said Zhou Qiren, an academic economist and former adviser to the PBOC, monetary loosening may already have gone too far.
"The market needs time to adjust, and structural reforms take time," he said at a forum Saturday. "The economy should be allowed to slide, or else a lot of problems won't be eradicated."
The fear of a resurgent property bubble is another factor that could be delaying easing.
"The central bank faces a dilemma now," said Liu Yuhui, director of a financial-research unit at the Chinese Academy of Social Sciences, China's top state think tank. Lower lending rates would help enterprises with their financing costs but could also risk undermining the central government's controls on the property market, he said.
Bank of America Merrill-Lynch economist Lu Ting cited this policy dilemma Monday in cutting his forecast for China's economic growth this year to 7.7% from 8.0%.
"Further policy easing is constrained in China as policy makers have been increasingly sensitive to rebounding home prices," he said in a note. "Beijing's capability is constrained by its political concerns on home prices, and thus we expect no big-bang stimulus."
Since November, the central bank has cut the reserve ratio—the portion of deposits that banks must hold in reserve rather than lend out—three times by a total of 1.5 percentage points, with the last reduction taking effect May 18.
The PBOC cut benchmark interest rates once each in June and early July, and bank also began allowing rates to float in a wider range, allowing higher deposit rates and lower lending rates.
The PBOC could ease policy in more subtle ways that attract less media attention, such as in its daily transactions with banks.
"It is not correct to say the PBOC hasn't taken action recently," said UBS economist Wang Tao, pointing to open-market operations in July that she estimates injected about 800 billion yuan ($130 billion) of liquidity into the banking system.
Meanwhile, "it is not only the central bank that has taken or needs to take action," she said.
Besides monetary-policy loosening, there is also substantial fiscal support for the economy coming online, with accelerated approvals for infrastructure and investment projects, new purchase incentives for household appliances, and tax cuts for service-sector companies.
In a hopeful sign for those awaiting more support measures, government fiscal spending soared 37.1% in July from a year earlier—19.4 percentage points higher than June's growth—while revenue growth slowed by 1.6 percentage points to just 8.2%. Expenditure rising faster than revenue—basically taxes--means there is a net injection of funds into the economy.
"The government has adopted measures to boost growth. It is just that a bit more time is needed for the measures to take effect," Ms. Wang said.
