National Development and Reform Commission

Stopping at nothing in tough economic times

In the first of a four-part series examining the deepening of China's economic slowdown, we look at possible reasons for official inaction

PUBLISHED : Wednesday, 26 September, 2012, 12:00am
UPDATED : Wednesday, 26 September, 2012, 3:33am

The mainland economy has been experiencing a worse-than-expected slowdown, and the government's inaction, say some economists, is raising the odds of missing its growth target.

August data released earlier this month showed exports were hit hard by the European debt crisis and investments have yet to pick up despite Beijing's quickened approval of construction projects.

The downturn in the world's second-biggest economy has surprised many optimists who had become used to the astonishing growth of the past decade and also to aggressive official measures in turbulent times, such as the 4 trillion yuan (HK$4.89 trillion) stimulus package in 2008.

Many predicted the worst was over after the economy expanded at 7.6 per cent in the second quarter. But, until now, there has been little sign of recovery, something reflected by several investment banks revising down their gross domestic product projections for the second or third time this year to below 8 per cent.

Expectations had been high in recent months that the central bank would try to stimulate the economy by cutting interest rates or the ratio banks must set aside as reserves. But there has been no action on the policy front, an absence widely attributed to the once-in-a-decade leadership transition to be unveiled at the Communist Party Congress in autumn. Amid this, economists caution that the absence of stimulatory measures is raising the risk of a hard landing.

"It has not been easy to forecast the policy outlook in this year of the leadership transition," economists at Barclays Capital said. "Further policy inaction or delay means further downside risks to growth."

Meanwhile, speculation continues on who will sit on the Politburo or its Standing Committee to become China's ultimate decision-makers. The congress's exact start date has not been announced, suggesting continuing horse-trading for positions.

But, while some economists say the inaction is because leaders have been pre-occupied with the reshuffle, others argue that it is due to the different views officials have about the need to stimulate the economy and the risk that any measures might create a property bubble or inflation.

More economists gave up expectations of another interest rate cut this year after consumer inflation climbed 2 per cent year-on-year last month, accelerating from a 1.8 per cent increase in July. Central bank officials and academics recently warned of a comeback for inflation next year, helped by soaring soya bean and corn prices on world markets.

"Without high levels of unemployment or bad loan problems, we think the government is accepting the downward adjustment of growth which we believe is healthier for medium-term development," the Barclays economists said.

Beijing has held off interest rate cuts since July when the central bank lowered the rates for the second time this year. The National Development and Reform Commission (NDRC), the nation's top economic planner, announced earlier this month that it had approved 49 projects involving the investment of more than 840 billion yuan - most of which are city subway and light railway construction programmes.

Mizuho Securities economist Shen Jianguang said the NDRC's move showed the government recognised the risk of a hard landing. "Without further support from the government, the economy is unlikely to stabilise in the fourth quarter," Shen said.

Giving the green light to investment projects would not be enough to stimulate the economy, he added, without matching monetary policy to accommodate funding demand.

Zhu Haibin, an economist at JP Morgan Chase, expects the public investment to be supplemented by structural tax cuts and measures to encourage investment by the private sector.

Earlier this month, the Guangdong government announced that 182 projects involving 504 billion yuan of investment would be open to private capital investment. The move followed the launch last month of efforts by Zhejiang to attract 1.18 trillion yuan for 441 projects.

But, it is unclear how many private firms will sign up for the projects since abrupt policy changes may have weakened their confidence in investing in government-initiated projects.

It also remains to be seen whether banks will lend heavily after they were bitten by bad loans from the lending binge after the global financial crisis.