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China needs a policy mix to support domestic demand
By Zhu Haibin |
June 7, 2012, Thursday
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Print Edition
Print Edition
AMID growing concerns of intensifying external headwinds, especially given uncertainties surrounding the eurozone sovereign debt crisis, and with increasing signs of a decelerating domestic economy given the government's efforts to address structural imbalances, Chinese policymakers have been preparing to pull harder on the policy levers to support economic growth.
Recent policy statements from Premier Wen Jiabao as well as the State Council highlighted that growth now ranks high on the government's near-term policy priority list, and pro-growth fiscal, monetary, and industrial policies will be adopted going forward. Regarding macro policy actions, on the monetary policy side, we expect two more 50-basis-point cuts in the reserve requirement ratio, as well as open market operations to manage liquidity conditions.
On the interest rate front, on the conditions that the consumer inflation rate eases below 3 percent and economic growth continues with the sluggish trend, the central bank may decide to introduce an asymmetric rate cut in the third quarter, with a 25-basis-point cut in the benchmark lending rate.
Meanwhile, we expect fiscal policy to play a more active role in supporting the economy in the coming months, in the form of support for infrastructure and public investment projects, structural tax cuts as well as other policies to stimulate domestic consumption.
To track the progress being made on potential policy support, it is important to monitor the trend in medium and long-term loans, new fixed investment projects, government outlays for investment projects, and anecdotal evidence on investment projects approval by the National Development and Reform Commission in the coming months.
We expect the overall growth picture to remain soft in the second quarter, with a moderate policy-driven recovery in the second half and full-year 2012 GDP growth forecast at 7.7 percent (revised down from 8.0 percent previously).
As the Chinese economy has slowed over the past year, market expectations have been building since late last year for central government's macro policy to reverse its earlier tightening and to turn more supportive of growth.
Such expectations had focused on potential reserve ratio cuts, easing of credit policy, and the proactive fiscal policy actions. Nonetheless, macro policy appears to have been behind the curve so far this year.
The fiscal policy action has been quite muted. On monetary policy, the central bank has generally been very cautious. The two reserve ratio cuts this year were both delivered later than expected.
On credit, with the lingering impact of credit tightening last year, new loan creation has generally been weaker than expected during the first four months of this year. Notably, medium- and long-term loans, which have historically been closely related to fixed investment growth, have slowed significantly, rising 9.1 percent in April, the slowest pace of growth in more than a decade.
Recent policy statements from Premier Wen Jiabao as well as the State Council highlighted that growth now ranks high on the government's near-term policy priority list, and pro-growth fiscal, monetary, and industrial policies will be adopted going forward. Regarding macro policy actions, on the monetary policy side, we expect two more 50-basis-point cuts in the reserve requirement ratio, as well as open market operations to manage liquidity conditions.
On the interest rate front, on the conditions that the consumer inflation rate eases below 3 percent and economic growth continues with the sluggish trend, the central bank may decide to introduce an asymmetric rate cut in the third quarter, with a 25-basis-point cut in the benchmark lending rate.
Meanwhile, we expect fiscal policy to play a more active role in supporting the economy in the coming months, in the form of support for infrastructure and public investment projects, structural tax cuts as well as other policies to stimulate domestic consumption.
To track the progress being made on potential policy support, it is important to monitor the trend in medium and long-term loans, new fixed investment projects, government outlays for investment projects, and anecdotal evidence on investment projects approval by the National Development and Reform Commission in the coming months.
We expect the overall growth picture to remain soft in the second quarter, with a moderate policy-driven recovery in the second half and full-year 2012 GDP growth forecast at 7.7 percent (revised down from 8.0 percent previously).
As the Chinese economy has slowed over the past year, market expectations have been building since late last year for central government's macro policy to reverse its earlier tightening and to turn more supportive of growth.
Such expectations had focused on potential reserve ratio cuts, easing of credit policy, and the proactive fiscal policy actions. Nonetheless, macro policy appears to have been behind the curve so far this year.
The fiscal policy action has been quite muted. On monetary policy, the central bank has generally been very cautious. The two reserve ratio cuts this year were both delivered later than expected.
On credit, with the lingering impact of credit tightening last year, new loan creation has generally been weaker than expected during the first four months of this year. Notably, medium- and long-term loans, which have historically been closely related to fixed investment growth, have slowed significantly, rising 9.1 percent in April, the slowest pace of growth in more than a decade.
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