This Article is From Jun 15, 2014

China Seeks Spending Fix as Economy Wobbles

China Seeks Spending Fix as Economy Wobbles

China is unlikely to resort to the kind of spending splurge that saw it through the 2008 financial crisis to deal with its slowing economy, analysts say. (Representational Image)

Shanghai: China is unlikely to resort to the kind of spending splurge that saw it through the 2008 financial crisis to deal with its slowing economy, analysts say, but recent moves to ramp up state support suggest it cannot wean itself completely off the stimulus drug.

Policymakers are seeking more tools to keep growth from dipping below the key 7.5 percent level, worried job losses could spark social unrest.

The central bank announced Monday it will slash the amount of funds some lenders, including rural banks, must hold in reserve to pump more money into the economy -- the second such move in two months.

Chinese Premier Li Keqiang on Wednesday gave details on plans announced in March to transform China's longest river, the Yangtze, into an "economic belt" by building transport infrastructure to link the country's west and east.

Speaking to academics in the past week, Li called for more attention towards a "targeted" adjustment of the economy, using the phrase for the first time, though he added "fine-tuning" was needed to keep growth on track.

But analysts said the basket of measures accumulated so far this year had moved beyond their original label of small-scale pump-priming.

"It's certainly past the so-called 'mini-stimulus' and the scope of 'fine-tuning'... but it's not a big stimulus either," Liu Li-Gang, a Hong Kong-based economist for ANZ Bank, told AFP.

"It might speed up China's investment growth a little but it's not comparable to the 4-trillion-yuan package during the financial crisis," he said.

In March, Premier Li announced an economic growth target of "around 7.5 percent" for this year and has repeated that China can meet that goal.

China's economy grew an annual 7.7 percent in 2013, the same level as 2012, which was the worst pace since 1999.

The binge of 4.0 trillion yuan -- $656 billion at current exchange rates -- on infrastructure in 2008 and 2009 still reverberates with a deflating property market bubble and a multi-trillion dollar "shadow banking" sector which grew out of loose credit.

- Little appetite for big stimulus -

This time around the government is reluctant to match those levels of spending.

"The new leadership has ruled out a repeat of the big stimulus in 2008-09," said Jian Chang, China economist at Barclays Capital in Hong Kong.

"A highly leveraged economy with mounting financial and fiscal risks related to surging shadow bank lending and ballooning local government debt will constrain policy options," she added.

Other measures this year include speeding up infrastructure investment especially for railways, building affordable urban housing and accelerating spending of already-budgeted funds.

The economy found some relief on Friday with indicators like industrial production and fixed-asset investment - a key measure of spending on infrastructure - remaining steady in May compared with April, which could take some pressure off the government.

"The property sector is still putting downwards pressure on the economy but this appears to have been largely offset by infrastructure spending and other targeted measures, which have shored up other areas of the economy," said Julian Evans-Pritchard, China Economist for Capital Economics.

Still, the government will have to do more if it wants to stabilise the economy, also a key driver for the world.

China's gross domestic product (GDP) grew an annual 7.4 percent in the first quarter of this year, weaker than the 7.7 percent in the previous quarter and the worst since a matching 7.4 percent expansion in the third quarter of 2012.

"If economic growth for the second quarter comes in lower-than-expected, then it's likely to see the government taking further measures," Wendy Chen, Shanghai-based economist for Nomura International, told AFP.

China will announce GDP for the second quarter on July 16.

"We expect further stimulus policies in the second and third quarters, on both the monetary and fiscal sides," she said, adding this could include an across-the-board cut in reserve requirements for banks.
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