Downside risk comes into play on policy

PUBLISHED : Friday, 18 July, 2008, 12:00am
UPDATED : Friday, 18 July, 2008, 12:00am

Impact of slowdown to weigh on decisions

The fervent debate about the threat of overheating against a slowdown may have cooled after the mainland disclosed the economic picture for the first half yesterday. Economists almost unanimously expect Beijing to give a higher priority to the downside risk: an economic slowdown for the rest of the year.

Major investment banks lowered their gross domestic product forecasts for the full year, after the National Bureau of Statistics said second-quarter GDP grew at 10.1 per cent, slower than the 10.6 per cent growth in the first quarter.

Goldman Sachs lowered its projections to 10.1 per cent from 10.5 per cent for this year and to 9.5 per cent from 10 per cent for 2009. That would be the first time growth dropped below double digits since 2002. JP Morgan Chase cut its forecast for 2008 to 10.2 per cent from 10.5 per cent, saying the export outlook was a concern but a domestic fiscal boost, including infrastructure investment and corporate subsidies, would pick up the slack. Credit Suisse expects 9.8 per cent GDP growth in 2008, while Deutsche Bank sees 10.2 per cent.

To balance the conflicting demands of an economic slump and inflation, economists said the policy scenarios for the rest of the year could include slower yuan appreciation; no interest rate increases; higher reserves for banks; measures by the central bank to mop up liquidity; credit easing in selected areas; tax-rebate increases to bail out some export industries; liberalisation of fuel prices; and an active fiscal policy to support the poor, small enterprises and post-earthquake reconstruction.

At the end of last year Beijing gave top priority to curbing inflation. But since then the balance has been tilting towards preventing a slump.

'In March and April, the priority was equally distributed between the two,' said Deutsche Bank chief economist Ma Jun. 'But the top leadership's concern has been shifting. The downside risk is their biggest concern now and for the rest of the year.'

The first-half picture shows the mainland's resilience amid the global financial troubles and domestic disasters. GDP grew 10.4 per cent year on year, still a robust increase though lower than 11.9 per cent for all of 2007.

Compared with year-ago figures, the trade surplus decreased sharply by US$13.2 billion to US$99 billion in the first half, but fixed-asset investment rose 26.3 per cent to 6.84 trillion yuan and retail sales rose 21.4 per cent to 5.1 trillion yuan, offering solid support to economic growth.

'It is amazing that China is still able to maintain double-digit growth rates while some of the major economies have been worrying about falling into recession,' said Sherman Chan, an economist with Moody's 'The continued fight to improve living standards for low-income people is a huge boost to GDP growth.'

But other economists worried whether support from domestic consumption would be sustainable to the end of the year and into next.

'The negative wealth effect from the stock and property market downturn will bite, which will influence people's spending,' said Mr Ma.

JP Morgan Chase economist Frank Gong said: 'Household and business confidence has been modestly weakening, as a recent survey by the statistics bureau shows.'

Urban dwellers' average disposable income rose 6.3 per cent year on year, after adjusting for inflation, to 8,065 yuan (HK$9,220) for the six months, and rural incomes rose 10.3 per cent to 2,528 yuan. Urban residents' income growth is the slowest in a decade.

The pressure of higher wages, together with rising prices for industrial raw materials, is expected to weigh on consumer inflation, though food prices eased in the past two months. 'There are still uncertainties in the CPI inflation outlook,' said Lehman Brothers economist Sun Mingchun.

Additional reporting by Ran Chen

GDP in the first six months reached 13.06 trillion yuan

Per-capita disposable income of urban residents reached 8,065 yuan in the first half, while cash incomes of rural residents reached 2,528 yuan

Food prices, which make up a third of the consumer price basket, rose 20.4 per cent from a year earlier in the first half. Housing costs rose 6.9 per cent.