In China, Weak Growth Is Expected to Push Beijing into Action - New York Times

HONG KONG â€" China’s leaders are widely expected to cut interest rates and encourage lending after data on Wednesday showed that an industrial slump and a weak housing market had dragged economic growth to its slowest pace in six years.

The question now is whether those steps will be enough to avert an even sharper slowdown.

Key barometers of the country’s economic health are looking gloomy. Industrial production in March increased at its slowest pace since late 2008, while retail sales, a sign of consumer demand, rose at the slowest rate in nearly a decade. Land purchases by developers, a major source of revenue for China’s heavily indebted local governments, fell 32 percent in the first three months.

”There certainly is pressure now, and the pressure on some sectors is quite heavy,” China’s premier, Li Keqiang, told a gathering of economists in Beijing on Tuesday, before the new growth figures were released.

Continue reading the main story

Related Coverage

• 

  China’s G.D.P. Slows to 7 Percent, the Weakest Rate Since 2009APRIL 14, 2015

While acknowledging the pressures, Mr. Li continued, ”but there is also impetus, and many businesses take a positive long-term view of this market,” He added: “Our toolbox still has many policy tools, and the biggest tool is reform.”

Traditionally, China’s biggest and most effective policy tool has been ordering the state-controlled financial system to increase lending, which lifts investment that quickly translates into economic growth.

But the overhauls Mr. Li mentioned are aimed at reducing this dependence on credit-fueled growth â€" which the consulting firm McKinsey estimates has pushed China’s overall debt to as much as 282 percent of gross domestic product â€" and replacing it with an approach that relies on household demand. That transition will take time and, as the latest figures suggest, could be uncomfortable.

“China can perhaps defer or elongate the slowdown in aggregate growth but not prevent it,” George Magnus, a financial consultant and former chief economist at UBS, said in an email. “It’s kind of what rebalancing requires â€" a downshift in the investment rate. But I’m not sure the leadership is willing to swallow hard and let it happen.”

In the first three months of the year, China’s economy grew 7 percent compared with a year earlier, in line with economists’ forecasts. Although the growth rate means China still has one of the world’s fastest-growing major economies, it is the country’s slowest quarterly expansion since early 2009, when it was still feeling the effects of the global financial crisis.

China’s Communist Party leadership has lowered its official growth target for this year to about 7 percent. That would be the nation’s slowest annual expansion in 25 years. Policy makers are trying to manage the slowdown in a way that preserves job creation and keeps credit flowing to businesses. For the central bank, that means keeping monetary policy loose enough to fend off an increased risk of deflation, or falling prices, which could lead companies to reduce hiring and curtail investment.

Since November, the central bank, the People’s Bank of China, has cut interest rates twice and given banks the freedom to lend more. Most economists expect it will further lower the amount of cash that banks must keep on reserve â€" a move that would also counter a trend in recent months of funds’ flowing out of the country â€" and to cut interest rates again.

These measures appear to be having an effect, with important short-term borrowing rates in China’s money market, an important indicator of the real cost of funding for smaller banks and other financial institutions, falling to about 3 percent in the past week, down from about 5 percent in February.

Haibin Zhu, the chief China economist at J.P. Morgan in Hong Kong, said he expected the central bank to take action in the next three months. “But is that sufficient to call it easing, or is it a delayed response â€" what in economic terms we call moving behind the curve?” he said in a phone interview. “Probably moving behind the curve, or at best staying on it.”

Other efforts to stimulate growth this year include significant government spending on infrastructure. Mr. Li, the Chinese premier, said in a speech last month that the government would spend over 800 billion renminbi, or about $130 billion, on new railroad lines this year and another 800 billion renminbi on major water conservation projects.

”March data does show that infrastructure investment accelerated, although it’s not sufficient to offset the slowdown in manufacturing and real estate,” Mr. Zhu said.

China’s housing market continues to struggle, with home prices falling and new construction starts declining. This has effects at home and abroad, including impacts on domestic steel production, pricing of imported iron ore from Australia and employment of sales agents at property brokerages across China.

Foreign trade has been buffeted by lackluster overseas shipments and signs of even weaker demand at home. Exports of goods by value rose only 5 percent in the first three months of the year, while imports slumped 17 percent, weighed down by lower global prices for oil and other commodities.

Sheng Laiyun, the spokesman for China’s National Bureau of Statistics, said that “downward pressure” on the Chinese economy came from both external factors, including the tepid recovery of many economies, and domestic factors. New sources of growth were emerging, he said, “but in the short term, it’s difficult for them to make up for the subsiding of traditional drivers.”

Chris Buckley contributed reporting.

Loading...

via Business - Google News http://ift.tt/1CNowUI

Put the internet to work for you.

Delete or edit this Recipe