Beijing prodded to act on growth amid risk of further slowdown
Turnaround on key indicators for last month points to policymakers' resolve to shore up mainland economy, with more policy support likely
The risk of a further slowdown in China's economy has prompted the most active flurry of policy-easing measures since 2012, signalling Beijing's determination to prevent growth from slipping below 7 per cent.
Already, a marked turnaround in business and consumer sentiment during May displays a belief that the government will not allow significant further deterioration in economic growth, which slipped below the official 7.5 per cent target in the first quarter to an 18-month low of 7.4 per cent, though analysts say some gauges, such as power output, remained weak.
However, consumer sentiment showed a strong bounce from a low in March, the Westpac MNI survey found last week.
Analysts expect credit to be eased further if the economy failed to hold up well.
A State Council meeting chaired by Premier Li Keqiang decided on Friday to allow more banks to reduce the required share of their deposits that must be parked at the central bank as reserves, provided that the banks have lent enough to smaller firms and agricultural businesses.
It is the second major step the government has taken towards increasing liquidity, after the central bank lowered the reserve requirement ratio (RRR) for rural lenders in April.
Although details are still lacking on how many banks would be affected by the latest move, analysts believe it would drive markets' expectations for interest rates lower and boost confidence in an economic rebound.
"It is clear that the government has become more concerned about the continued economic slowdown and wants to further increase the strength of policy support," UBS Securities economist Wang Tao said.
"While refraining from using strongly symbolic measures such as a general RRR cut, the government is trying to use targeted liquidity and credit easing to deliver more effective credit support."
Other steps decided at the cabinet meeting included increasing re-lending - in which the central bank lends money to banks, which put up collateral - to support micro businesses and boosting the sale of bonds to fund specific projects.
Some economists said measures rolled out in the past two months indicated the slide in growth might have extended into the second quarter with the cooling property market intensifying pessimism.
Beijing is keen to correct the misallocation in investment and resources through financial and fiscal reforms. But the leadership has also clearly stated its determination to prevent a hard landing or a surge in joblessness.
During a recent field trip, the premier repeated his warning about downward pressures on the economy.
Li called on all levels of authorities to "place development as the top priority".
Soon afterwards, the Ministry of Finance urged local governments to accelerate fiscal spending to combat a slowdown.
For the first time in two decades, China launched a pilot programme last month to allow 10 relatively wealthy cities and provinces to directly issue bonds, in the hope of establishing a sustainable funding mechanism for authorities to finance local projects.
The National Development and Reform Commission also rolled out a list of 80 infrastructure projects that are now open to private investment.
Measures taken so far would ease liquidity to support selected weaker areas of the economy while accelerating investment.
Stephen Green, head of Greater China research at Standard Chartered Bank, told the South China Morning Post: "I think as evidence of a broader slowdown becomes clearer, they'll need to do more. But they'll take their time.
"Without evidence of a jobs crisis or systemic financial risks breaking out, they will continue on this gradual path."
Green warned that there is a risk that the fresh liquidity will be channelled to undesirable areas, such as the property market.
"Money moves around - it's impossible to control, though Beijing is going to try hard to push it into priority areas," he said.
It is estimated that a broad-based reserve ratio cut of half a percentage point would pump about 500 billion yuan (HK$628 billion) into China's interbank system.
But the credit transmission mechanism in China is broken, and funding is not directed to companies that need it most, said Leland Miller, the president of China Beige Book International.
"In practice, this means that private domestic firms, and particularly [small and medium-sized enterprises], are massively disadvantaged compared with [state-owned enterprises] in terms of access to capital," Miller said.
As one example, Xinjiang Qin Guang Xin Commercial and Trade had to pay an annual interest rate of 10.2 per cent on loans, chairman Wang Guangjun told the Post. That is more than 70 per cent higher than the prime rate major banks offer to their best customers.