INTENSE pressure from the business sector and regional governments, and easing inflation, will allow Beijing to loosen clamps on credit in two or three months, a China economist for W I Carr (Far East) says. 'It has realised that further tightening will be too costly in terms of growth, jobs, and politics,' Joe Zhang told an Australian Chamber of Commerce lunch yesterday. He said the declining inflation rate was more a result of government price controls and subsidies, but it had given the state 'a good reason to ease credit'. He said some provinces were teetering on the edge of recession under the two-year austerity programme, and China's capital stock was shrinking in real terms. China posted fixed-asset investment growth of 21.2 per cent in the first half of the year, but the real rate was actually negative after adjusting for inflation, depreciation and wastage during construction, he said. Mr Zhang was more optimistic than the prevailing opinion of observers, which maintained that credit would not be loosened until the first half of next year at the earliest. An economist with the State Statistical Bureau economist, Qiu Xiaohua, went further, predicting the squeeze on credit would continue into the second half of next year. Mr Qiu said China would ease credit in the second half of next year to stimulate growth and pave the way for the return of Hong Kong in 1997. Mr Zhang said this October or November would be a more appropriate time to ease credit, because banks would need money to finance the procurement of the autumn harvest. 'Politically, the government cannot afford to allow state procurement firms to pay farmers IOUs any more,' he said. 'Given the already very tight credit condition, banks have to write new loans.' Mr Zhang said the austerity programme had been overdone. It had not cured inflation, given that inflation stood at the same level as two years ago when the measures were first launched. He said the inflation was driven mainly by high consumption and price reforms, instead of the commonly quoted reason of excessive money supply. The real money supply growth was low, after adjusting for inflation, and was sometimes negative in the past two years, he said. He said China's exports would be affected by the austerity programme because exporters had piled up accounts receivable. They had rushed to sell goods abroad, offering generous terms to overseas customers, after mainland clients failed to meet payments. 'It will contain the export momentum in the second half of the year and beyond,' he said. Mr Zhang said if China loosened its tight monetary policy in October or November, inflation would be affected only after April or May next year. 'By that time, inflation, measured by the retail price index, will have already fallen to as low as 10 to 11 per cent,' he said.