January 16, 2012
WARNING bells on the Chinese economy will begin to clang in earnest this week with the country's quarterly growth expected to fall below 9 per cent for the first time since 2009.
But economists say the country's policymakers will step up the easing of monetary policy in coming months, releasing tens of billions of dollars worth of cash into the world's second largest economy in an effort to ensure a rebound in growth figures later this year.
China's GDP for the last quarter of 2011, to be unveiled tomorrow, is expected to be 8.6 per cent, according to UBS economist Wang Tao, while Deutsche Bank tips 8.5 per cent.
But GDP is heading for a bigger slump in the next quarter after the Purchasing Managers Index (PMI) slowed in the last quarter of 2011 to its lowest rate in almost three years.
China's growth is expected to fall quite sharply during the first half this year to 6.4 per cent on a quarter-to quarter basis, thanks to a government-induced fall in property activity and prices, and because of falling exports due to poor economic conditions in Europe and the US.
The decline in China's GDP is expected to hit the resources-heavy Australian stockmarket -- which tends to overreact to Chinese economic data -- as well as the dollar, which is linked to the China resources story.
"We expect a quarter-on-quarter GDP growth trough in the first quarter of 2012 at 6.4 per cent, mainly on the back of the deteriorating outlook for real estate fixed-asset investment in the coming months," Deutsche Bank economist Ma Jun said in a preview note for 2012. "We continue to expect a rebound in the sequential GDP growth from the second quarter on policy easing."
The government has already started to pump money back into the economy with a cut to the reserve rate requirement (RRR) -- the percentage of its funds held as cash -- by 50 basis points in December. Analysts are expecting at least two matching cuts in the first six months of the year .
"The two major shocks to the economy in the coming months will likely be property fixed asset investment (FAI) deceleration and export slowdown," Mr Ma said.
"We expect property FAI growth to slow from the current 30 per cent to 14 per cent year on year in the first few months of 2012. We expect export growth to decelerate from the current 15 per cent to 8 per cent in the first quarter of 2012."
Lower growth will trigger more visible policy easing, analysts say, which will in turn lift domestic investment and economic activity from the second quarter onwards.
"With respect to monetary policy, we expect three to four RRR cuts in 2012, which should permit the average monthly yuan lending to rebound in the first half, and annual lending to reach about 8.4 trillion yuan ($1.29 trillion) in 2012," Mr Ma said. This meant lending this year would top last year's total of 7.5 trillion yuan.
"We expect modest fiscal easing in 2012," he said. "Fiscal priorities should include public housing, completion of ongoing infrastructure projects, SMEs (small and medium businesses), services and consumption."
Another advantage of the growth slowdown is that inflation, for the time being, has been beaten back down to 4.1 per cent in December from a high of 6.5 per cent in July, and is predicted to be between 3 and 4 per cent again this year.
Mr Ma said he expected CPI inflation to fall sharply, from the current 4.21 per cent in December to 2.5 per cent in the second quarter. "As CPI inflation eases, the likelihood of the government formalising a power tariff reform and the restoration of oil refining margins will rise," he said.
"We estimate that a 5 per cent increase in power tariffs, together with a 5 per cent rise in petrol/diesel prices, will push up CPI by only 0.2 per cent, and that these two measures are politically feasible in the coming months."
Article by Michael Sainsbury, China correspondent From:The Australian