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POLITICAL ECONOMY
China's output growth at near three-year low
by Staff Writers
Beijing (AFP) May 11, 2012


China says to cut bank reserves as economy falters
Shanghai (AFP) May 12, 2012 - China said on Saturday it would cut reserve requirements for banks, after disappointing economic data raised fears of a sharp slowdown in the world's second largest economy.

The People's Bank of China, the central bank, said it would cut banks' reserve requirements by 0.50 percentage points effective from May 18, according to a statement posted on its website.

The move was widely expected after China on Friday reported industrial production growth slumped to a three-year low in April and other figures also disappointed, adding pressure on Beijing to ease monetary policy.

Beijing has already cut bank reserve requirements twice since December as it seeks to boost lending to spur growth, but economists have called for more policy support as economic figures continue to disappoint.

China's economy grew an annual 8.1 percent in the first quarter of 2012, its slowest pace in nearly three years.

The government is targeting economic growth of just 7.5 percent for the whole year, down from actual growth of 9.2 percent last year and 10.4 percent in 2010.

After the latest move takes effect, China's reserve requirement for most large banks will fall to 20 percent, the official Xinhua news agency said.

Smaller banks will be required to maintain reserves of 16.5 percent.

Analysts said the cut should help pump an additional 400 billion yuan ($63 billion) of liquidity into the economy.

"This is the correct policy action from the central bank's point of view. Basically, this is just to respond to the weak April data," Zhou Hao, China economist for ANZ Global Markets, told AFP.

Some analysts were predicting a move as early as this month, especially after easing inflation gave the government room to loosen monetary policy by cutting reserve requirements.

"Over the short term, especially in the first half of this year, it looks like inflation is under control. So this is good time for them to use monetary policy," Zhou said.

China also said Friday that the consumer price index, the main gauge of inflation, rose 3.4 percent year on year in April, easing from 3.6 percent in March.

But other economic figures dashed expectations that China's economy was heading for a rebound, analysts said.

"Whether foreign trade, investment, tax revenue or credit growth, they all showed the phenomenon of slowing down," said Lian Ping, chief economist at the Bank of Communications.

"The central bank lowering the reserve requirement ratio at this time will strengthen economic vitality," he told state media.

China announced anaemic trade figures on Thursday, which showed a rise of just 0.3 percent in imports for April while exports were up just 4.9 percent.

That highlighted the government's tough task of trying to shift to a more domestic-driven economy as it looks beyond exports, which have been hammered by Europe's debt crisis and stuttering recovery in the United States.

China said Friday that output growth hit a three-year low in April, adding to pressure on Beijing to ease monetary policy after weak trade data the previous day fuelled fears over the giant economy.

Official data showed on Friday that industrial output in the workshop of the world rose 9.3 percent last month, the slowest pace since May 2009 and below the 12.2 percent forecast in a poll of economists by Dow Jones Newswires.

Analysts said the data, combined with a fall in investment growth to 20.2 percent in the first four months of this year, boosted the case for allowing more credit to flow into the economy.

"China's economy is even weaker than thought, with industrial production growth back in single digits for the first time since the global financial crisis," said Ren Xianfang, an economist for IHS Global Insight.

China's economy grew 8.1 percent in the first quarter of 2012, its slowest pace in nearly three years, while leaders target growth of just 7.5 percent for the whole year -- down from 9.2 percent last year and 10.4 percent in 2010.

Beijing has already cut bank reserve requirements twice since December as it aims to boost lending to spur growth, but economists are call for more policy changes as data continue to disappoint.

Also on Friday Beijing said the consumer price index (CPI), the main gauge of inflation, rose 3.4 percent year on year in April, compared with 3.6 percent in March.

The key food component rose 7.0 percent year on year -- contributing more than two percentage points to overall inflation -- although it is down from 7.5 percent in March, the National Bureau of Statistics said.

China has targeted annual inflation within four percent this year, in the knowledge that surging prices carry the potential to cause social unrest.

"The top issue for China's economy is not inflation, but rather how to maintain economic growth," Liao Qun, China economist for Citic Bank International in Hong Kong, told AFP.

Easing inflation should give China more room to pursue more active monetary policies to combat slower economic growth.

"The easing in inflation pressure opens the room for fine-tuning of monetary policy," said Zhu Haibin, an analyst with JP Morgan in Hong Kong, predicting up to three more reserve ratio cuts by the end of this year.

Investments in urban fixed assets rose 20.2 percent year on year in the first four months of 2012, weakening from 20.9 percent in January-March.

Fixed asset investment in the cities are a key gauge of government infrastructure spending, which has surged in recent years as Beijing has sought to cushion the impact of the global downturn.

"Today's data on April spending and output put another nail into hopes that China's economy is bottoming out," said Mark Williams, an analyst with Capital Economics.

Friday's data added to the anaemic trade figures on Thursday, which showed a rise of just 0.3 percent in imports for April while exports were up just 4.9 percent. That compared with analysts' forecasts of a 10 percent in imports 8.5 percent jump in overseas shipments.

The news highlighted the government's tough task of trying to shift to a more domestic-driven economy as it looks beyong exports, which have been hammered by Europe's debt crisis and stuttering recovery in the United States.

However, Friday's data also showed the producer price index (PPI), which measures the cost of goods at the farm and factory gate and indicates future consumer prices, slipped 0.7 percent in April from a year earlier, a sharper fall than the 0.3 percent in March.

Analysts said weakness in producer prices could become one of the main factors that spur the government to adopt further easing measures.

"The recovery is coming, but don't expect a problem-free growth spurt," IHS Global Insight said in a research note.

Chinese retail sales -- a guide on the government's progress in boosting domestic consumption -- rose 14.1 percent in April, down from 15.2 percent in March.

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