China - World Bank cautions China against slower expansion

A cooling economy in China may cause both a regional slowdown and plunging commodity prices, the World Bank warned, as the State Council reiterated its determination to ensure steady growth.

The bank also lowered its growth estimate to 8.2 per cent from 8.4 per cent in April.

"China's near-term policy challenge is to sustain growth through a soft landing, and the ongoing slowdown is partly welcome because it reflects a deceleration in growth from above-potential levels," the bank said yesetrday in its biannual East Asia and Pacific economic update.

"However, while the prospects for a gradual slowdown remain high, there are concerns that growth could slow too quickly."

Concerns over slowing growth have intensified after weak economic data for April, released last week, highlighted declining production, trade, investment and credit growth.

At an executive meeting of the State Council yesterday, Chinese Premier Wen Jiabao vowed to place greater priority on maintaining steady growth.

"Some contradictions and problems still exist in the economy. Downward pressure is increasing," the premier said.

Efforts should be taken to improve flexibility and vision and domestic demand must be boosted, he said.

Vice-Premier Li Keqiang, during a tour on Tuesday to East China's Jiangsu province, also urged greater consumption through more public spending on medical reform and more affordable housing projects.

The World Bank is confident that the government has sufficient room for maneuverability to respond to downside risks.

"Given the already accommodative monetary stance, the burden of any policy support should fall on fiscal policy," the Washington-based lender said.

Fiscal stimulus should be less credit-fueled, less local government-funded, and less infrastructure-oriented, unlike the four-trillion yuan (US$630 billion) package in 2008, the bank suggested.

"Measures to support consumption, such as targeted tax cuts, social welfare spending and other social expenditures, should be viewed as the first priority," according to the report.

Monetary policy could also be adjusted on the margin, as bank reserve requirements could be tweaked further to ease the availability of credit. But cutting interest rates would better be reserved for further downside scenarios considering the positive real rates, according to the report.

"Ongoing curbing efforts have been helpful in cooling the property market, but administrative regulations would better give way to market-based measures such as raising the cost of capital and more investment opportunities," according to the report.

Nonetheless, given heightened levels of uncertainty, policy should remain flexible, with frequent but gradual adjustments as new data became available, the report said.

"Monetary policy adjustment is not enough to rescue China from the current situation," said Liu Yuhui, a researcher with the Institute of Finance and Banking at the Chinese Academy of Social Sciences.

The proportion of long-term loans has shrunk to only 20 per cent of total credit in the first four months of this year, reflecting sluggish household demand, Liu said.

"People have stopped borrowing and focused more on paying debt … the government needs to adopt more fiscal tools to inject a force for growth," he said.

Liu Shangxi, a researcher with the Ministry of Finance, said positive fiscal policy will be mainly carried out throughout investment such as affordable housing.

However, fears were also raised over the sustainability and effectiveness of short-term measures to boost domestic consumption.

Lu Zhengwei, chief economist with the Industrial Bank, said consumption has already contributed 6.2 per cent to economic growth in the first quarter, the highest in 20 years.

"Short-term stimuli are pointless … a way out would be to let the currency float with the dollar, and currencies of emerging economies, to allow an adjustment on the overvalued rate," Lu said.

Also yesterday, economists at Morgan Stanley said in Hong Kong that the economy may bottom out in the second quarter, with a rebound expected to start in the third quarter.

Downward pressure remains, as seen when GDP growth eased to 8.1 per cent in the first quarter from 8.9 per cent in the fourth quarter of last year, Helen Qiao, Greater China chief economist at Morgan Stanley, said.

"There will be more bad news than good in the near term, and the second quarter will be the worst," Qiao told a media briefing in Hong Kong on yesterday.

Morgan Stanley on Monday cut its GDP forecast to 8.5 per cent this year from the 9 per cent forecast previously, citing a worse-than-expected slowdown in the first four months this year.

Wei Tian and Li Tao

China Daily

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