• Fri
  • Dec 19, 2014
  • Updated: 12:00am

Beijing walks a fine line as economic growth stalls

Mixed signals on economy likely to delay decision on major monetary easing, with government opting for accelerated infrastructure spending

PUBLISHED : Wednesday, 14 May, 2014, 1:20am
UPDATED : Wednesday, 14 May, 2014, 1:20am

Weakness in the mainland economy may push Beijing to speed up infrastructure investment although analysts believe the top leadership will resist any "big bang" easing measures for now.

Despite the gloomy picture, infrastructure building accelerated slightly as a result of Beijing's policy fine-tuning, while inflation-adjusted consumption stabilised and exports have begun to show signs of gathering pace.

These mixed signals may prompt the authorities to wait another one or two months before deciding on any major monetary easing. For now, analysts expect Beijing to accelerate infrastructure investment while squeezing out excess from the property market.

President Xi Jinping on Saturday urged people to stay "cool-minded" and adapt to the "new normal" in growth. People's Bank of China governor Zhou Xiaochuan said at the weekend that short-term data fluctuations might not justify any policy shifts.

Vice Finance Minister Zhu Guangyao yesterday ruled out large-scale stimulus measures to smooth out short-term growth fluctuations as the country's basic economic situation had not changed. But Zhu told reporters after a meeting with US Treasury Secretary Jack Lew - in which Lew pressed Beijing to ease exchange rate controls and lower barriers to trade and investment - that measures would be initiated to support growth if needed.

Economic growth cooled to 7.4 per cent in the first quarter from 7.7 per cent in the previous period, but Beijing has signalled its willingness to sacrifice some growth while reforming an economic system overly reliant on investment and exports.

Louis Kuijs, the chief China economist at Royal Bank of Scotland, said: "In the coming months … we expect the current approach to macroeconomic policy - supporting growth without resorting to major stimulus - to be broadly maintained. However, growth risks remain, especially in real estate. If they materialise, we expect the government to ease policy further."

Property investment dropped to a 16.4 per cent growth year on year in the first four months from the 21.1 per cent rise a year earlier, the National Bureau of Statistics said yesterday. Fixed-asset investment growth decelerated to the slowest rate in more than 12 years in the January-April period, to 17.3 per cent, compared with the 17.6 per cent rise in the first three months and a 20.6 per cent gain in the first four months of last year.

Industrial production growth edged down to 8.7 per cent year on year last month from an 8.8 per cent growth in March. Retail sales remained lacklustre, with growth easing to 11.9 per cent from 12.2 per cent in March.

Wang Yuanhong, a senior economist at the State Information Centre, said infrastructure spending had picked up. In the first four months, infrastructure investment growth, excluding that in the power sector, was up 22.8 per cent year on year from 22.5 per cent in the first three months.

Haitong International Securities chief economist Hu Yifan said: "We expect more policies to be announced to push investment on infrastructure, including highways, subways, airports, ports, [fourth-generation] networks, smart grids and environment-related projects."


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The two main pillars of Reaganomics are tax reduction and deregulation --- the underlying ideology is ‘let the market work’.
The author says that China should do the same.
(Of course too much financial deregulation also partly causes the 2008 Great Crisis.)
While tax reduction can increase both domestic resident consumption and private investment, I want to add that this should be supplemented by more external demand, through further yuan devaluation.
‘To-some-extent-non-sterilising’ yuan devaluation can both stimulate exports and keep the domestic interest rate at a lower level, both to lower the country’s excess capacities and to facilitate business deleveraging.
To prepare for the coming military conflicts in the South China Sea, China can also engage in more armament investment which can help reduce some of the excess capacities and promote employment.
China may suffer a humiliating military defeat if the West and Japan give military aid to the other Asian countries. If so, this gives China one excuse to massively devaluate her currency as a form of revenge.
Through the coming Asia Infrastructure Investment Bank, China can also lend money to the other Asian countries to buy China's high-speed trains and other products. And similarly for the countries west of China along the new Silk Road.
As I have said before, the author thinks that China now resembles the United States in the early 1980s, facing the following challenges:
(i) With over-issue of money (now M2/GDP is already 2), the threat of high inflation can’t be ignored.
(ii) Given gradually lower GDP growth rate, investment stimulus alone can’t stop the declining trend (the law of diminishing marginal returns always reigns supreme).
(iii) Too many government regulations and guidance means a sluggish economy.
China is now in a situation of ‘falling-growth-stagflation.’
In response to the 2008 financial crisis, central banks around the world, not just the U.S. Federal Reserve, have responded by printing money, as shown by central banks’ balance sheet growth from 2008-2013:
Japan: 49%, Europe: 206%, England: 343%, U.S.:373%.
China: 500% !
(From 'Aftershock' by David Wiedemer et al)
One day, China’s high inflation rate may come back with a vengeance, but right now, so many people are still urging the PBOC to relax the monetary policy !
The QEs enacted in the West and in Japan, which are expansionary monetary policies in the extreme, don't seem capable of quickly solving the countries' economic woes --- after so many years their economes are still lukewarm, with no high quality employment growth.
For some reasons China's banks seem to resist securitising their housing loans.
They should be encouraged by the central bank to do so,
the money so released can be loaned out to support only the precarious and too-connected-to-fail property market.
The maturity mismatch and hence liquidity issue of the local governments' loans should be resolved through the issuance of long term municipal bonds and their other revenues, rather than through the Ponzi-scheme-like rolling-over of the loans in the expensive shadow-banking market.
The present more than 10% growth of M2 should be enough, and those SOEs' wasteful capacities should be eliminated as quickly as possible.
More bank loans should be provided to the qualified SMEs.
Relaxation of one-size-fits-all monetary policy should only be the last resort.
According to a Chinese author, further investment stimuli to prop up China's sagging economy is not a satisfactory strategy:
(a) More infrastructure investment can help sustain China’s GDP growth, but is not so effective in massively raising the employment level.
(b) China’s main problem is excess capacity, which can be solved not so much by more infrastructure investment, but by more domestic consumption and exports (external demand).
(c) The 4-triilion-yuan investment package shows that government-guided investment stimulus crowds out private investment, causing more imbalances in the economy.
(d) With so many accumulated debts, the local governments are already impotent to engage in further infrastructure investment (especially when the sorely-needed municipal bond market is yet to fully set up).
(Chinese readers: ****opinion.caixin.com/2014-05-14/100677101.html)


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