Rate cuts expected amid fiscal expansion
Beijing is expected to adopt an expansionary fiscal policy this year to boost aggregate demand, which will offer investors good opportunities in the mainland's infrastructure sector, according to officials from DBS Securities Hong Kong.
The People's Bank of China, the central bank, probably will cut interest rates and boost public spending on infrastructure projects to offset an expected slowdown in external trade and foreign direct investment, the brokerage's chief economist Chu Siu-wah, said yesterday.
As inflation would remain extremely low this year and real interest rates high, Beijing could afford to slash the rates sharply, probably in the second quarter of the year, he said.
Mr Chu said Beijing's 8 per cent economic growth target for this year was achievable as it would relax monetary policy in the next six to nine months to minimise the economic downturn.
Last year, gross domestic product rose 8.8 per cent.
'We think China's economy, at this stage of economic reform, can not afford to have GDP growth fall below 7 per cent, ' he said.
'Political stability is based upon economic stability - a rapid deterioration in living standards would ruin the current status quo.' He said the infrastructure investment would be the prime mover, largely due to Beijing's direct influence.
'The investment has been a relatively easy-to-control variable because more than 60 per cent of fixed-asset investment contribution is from the public sector,' he said.
He said he expected fixed-asset investment to rise by more than 15 per cent this year, compared with the official forecast of 10 per cent.
Amid the regional financial crisis, the mainland's export growth was expected to slow notably, falling from more than 20 per cent last year to between 8 and 10 per cent this year and next, Mr Chu said.
He said the trade surplus would fall from a record US$40 billion last year to $16 billion this year and drop further to $10 billion next year.
Foreign direct investment was set to slow from last year's $45 billion to about $30 billion in the wake of the increasing risk premium and the liquidity shortages among regional banks, he said.
Despite the negative factors, Mr Chu said Beijing would honour its promise not to devalue its currency this year but expected the yuan to depreciate by 5 per cent next year.
