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POLITICAL ECONOMY
China seeks spending fix as economy wobbles
by Staff Writers
Shanghai (AFP) June 15, 2014


China output, consumption pick up in May: government
Beijing (AFP) June 13, 2014 - Growth in China's industrial output and retail sales accelerated in May, with consumption increasing at its fastest pace since December, official data showed Friday, in signs of renewed strength in the world's second-largest economy.

Industrial production rose 8.8 percent year-on-year last month, the National Bureau of Statistics (NBS) said in a statement, up from 8.7 percent in April and matching the median forecast in a poll of 15 economists by the Wall Street Journal.

Retail sales, a key gauge of consumer spending, increased 12.5 percent last month from a year ago, the NBS said in a separate statement, up from a gain of 11.9 percent in April and the highest since 13.6 percent at the end of last year.

The data provided further evidence that economic activity in China is picking up as the government stepped up what economists call a "mini-stimulus" to arrest a slowdown seen earlier this year.

Friday's numbers "signal that China's growth momentum may soon bottom out, despite some downside risks", economists at ANZ Bank said in a research note, also citing an acceleration in export growth announced earlier this week.

China's gross domestic product grew by 7.4 percent in the first three months of 2014, weaker than the 7.7 percent recorded in October-December and the worst pace since a similar 7.4 percent expansion in the third quarter of 2012.

Fixed-asset investment, a main measure of government spending on infrastructure projects, slowed marginally to 17.2 percent year-on-year in the January-May period from a 17.3 percent rise in the first four months of the year, extending a decelerating streak that began in September.

China's leaders say they want consumer spending and other forms of private demand to propel the economy into a future of more sustainable, albeit slower, growth, and reduce an over-reliance on huge and often wasteful investment projects.

- Cautious steps by Beijing -

Beijing has introduced a number of measures to boost growth, including cuts in the amount of cash selected lenders must keep on hand in a bid to spur lending, financial support for small companies and targeted infrastructure outlays such as for railway lines and shantytown renovation.

But it has so far refrained from more aggressive steps such as interest rate cuts, citing worries about excessive credit.

"In our view, while the policy fine-tuning is not sufficient to change the trajectory of the growth profile, it will help lift the sentiment and stabilise the growth over the foreseeable future," the ANZ economists added.

Zhang Zhiwei, a Hong Kong-based analyst with Nomura International, said that he expects the stimulus measures to help stabilise economic growth at 7.4 percent in the second quarter and 7.5 percent for the full year, matching the government's 2014 target.

He added, however, that Nomura does not see the recovery as sustainable over the medium term.

"We continue to expect growth to slow to 6.8 percent in 2015," he write in a note.

The main risk to growth, analysts say, stems from the country's cooling property market, a sector key to driving economic expansion, local government revenue creation and maintaining the stability of China's financial system given huge loans granted to developers and home buyers.

New home prices in major Chinese cities posted their first month-on-month decline in nearly two years in May, an independent survey showed, with analysts pointing to factors including stringent bank loan criteria, expectations of falling prices, and financial trouble among developers.

The NBS data also showed growth in property investment in the five months through May slumped to 14.7 percent, the lowest since 12.5 percent in August 2009 amid the global financial crisis, indicating that developers remained cautious.

China is unlikely to resort to the kind of spending splurge that saw it through the 2008 financial crisis to deal with its slowing economy, analysts say, but recent moves to ramp up state support suggest it cannot wean itself completely off the stimulus drug.

Policymakers are seeking more tools to keep growth from dipping below the key 7.5 percent level, worried job losses could spark social unrest.

The central bank announced Monday it will slash the amount of funds some lenders, including rural banks, must hold in reserve to pump more money into the economy -- the second such move in two months.

Chinese Premier Li Keqiang on Wednesday gave details on plans announced in March to transform China's longest river, the Yangtze, into an "economic belt" by building transport infrastructure to link the country's west and east.

Speaking to academics in the past week, Li called for more attention towards a "targeted" adjustment of the economy, using the phrase for the first time, though he added "fine-tuning" was needed to keep growth on track.

But analysts said the basket of measures accumulated so far this year had moved beyond their original label of small-scale pump-priming.

"It's certainly past the so-called 'mini-stimulus' and the scope of 'fine-tuning'... but it's not a big stimulus either," Liu Li-Gang, a Hong Kong-based economist for ANZ Bank, told AFP.

"It might speed up China's investment growth a little but it's not comparable to the 4-trillion-yuan package during the financial crisis," he said.

In March, Premier Li announced an economic growth target of "around 7.5 percent" for this year and has repeated that China can meet that goal.

China's economy grew an annual 7.7 percent in 2013, the same level as 2012, which was the worst pace since 1999.

The binge of 4.0 trillion yuan -- $656 billion at current exchange rates -- on infrastructure in 2008 and 2009 still reverberates with a deflating property market bubble and a multi-trillion dollar "shadow banking" sector which grew out of loose credit.

- Little appetite for big stimulus -

This time around the government is reluctant to match those levels of spending.

"The new leadership has ruled out a repeat of the big stimulus in 2008-09," said Jian Chang, China economist at Barclays Capital in Hong Kong.

"A highly leveraged economy with mounting financial and fiscal risks related to surging shadow bank lending and ballooning local government debt will constrain policy options," she added.

Other measures this year include speeding up infrastructure investment especially for railways, building affordable urban housing and accelerating spending of already-budgeted funds.

The economy found some relief on Friday with indicators like industrial production and fixed-asset investment -- a key measure of spending on infrastructure -- remaining steady in May compared with April, which could take some pressure off the government.

"The property sector is still putting downwards pressure on the economy but this appears to have been largely offset by infrastructure spending and other targeted measures, which have shored up other areas of the economy," said Julian Evans-Pritchard, China Economist for Capital Economics.

Still, the government will have to do more if it wants to stabilise the economy, also a key driver for the world.

China's gross domestic product (GDP) grew an annual 7.4 percent in the first quarter of this year, weaker than the 7.7 percent in the previous quarter and the worst since a matching 7.4 percent expansion in the third quarter of 2012.

"If economic growth for the second quarter comes in lower-than-expected, then it's likely to see the government taking further measures," Wendy Chen, Shanghai-based economist for Nomura International, told AFP.

China will announce GDP for the second quarter on July 16.

"We expect further stimulus policies in the second and third quarters, on both the monetary and fiscal sides," she said, adding this could include an across-the-board cut in reserve requirements for banks.

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