How China is tailoring policy for slowing growth
BEIJING () -- Government spending is likely to increase in the third quarter as policy makers make good on promises to support economic growth in the face of a nerve-rattling slowdown in the first half, economists and analysts say.
The slowdown is generally expected to continue for some time, in part due to persistent weakness abroad that has pinched China's export markets. Government agencies plan to ease the pain by stepping up public infrastructure investment, which drives demand for key commodities such as steel.
The upcoming surge in spending would complement other government policy adjustments, including a relaxing of real estate market controls in place since 2010, interest rate cuts by the central bank, and new incentives for banks aimed at encouraging loans to small and medium-sized companies.
Significantly, the central government has softened its stance on real estate controls since April, said Xu Gao, chief macroeconomic analyst at Everbright Securities. Supporting his position is a statement by Vice Premier Li Keqiang, who recently said Beijing "should stabilize real estate market regulations."
Analysts say government agencies have become more willing to approve new building projects and cut mortgage interest rates. There's even talk in the industry about a possible surge in real estate prices, some 30 months after the government imposed price-capping and lending controls to battle housing inflation.
A nine-month decline for average new home prices ended in June, a report by the China Index Academy said. In 100 cities monitored, the report said, the average price jumped .05% between May and June to 8,688 yuan ($1,366) per square meter. Separately, Huatai Securities reported substantial month-on-month and year-on-year increases in June for total residential floor space sold in 18 major cities.
Nevertheless, analysts expect government investment, not real estate, to lead the economy in coming months. Central and local governments are particularly motivated to boost spending to meet objectives of the current five-year plan and complement this year's leadership changes, said Liu Yuanchun, a professor at Renmin University's China School of Economics.
Rising from bottom
The year-on-year GDP growth rate may have bottomed out at 7.6% in the second quarter, said National Bureau of Statistics (NBS) Director Xu Xianchun, who predicted a "moderate rebound" for growth in the third quarter. He based his forecast on what he said is a likely recovery for Chinese export demand and property price increases.
Official data reflected lukewarm growth as the second quarter ended in June. The NBS Purchasing Managers Index, a barometer of business activity, fell 0.2% to 50.2% in June from the previous month.
The Consumer Price Index rose only 2.2% in June from the same month 2011, the slowest year-on-year growth rate for the inflation gauge in two years. These statistics prompted some analysts to predict future monetary easing by the central government. Others said the data might presage a deflation period.
The government quickly allayed those fears, however, as the People's Bank of China on July 5 surprisingly cut the one-year benchmark interest rate for bank deposits by 0.25% and the benchmark loan rate 0.31%. The moves followed a 0.25% cut for each rate less than a month earlier.
Analysts such as UBS China economic research chief Wang Tao said he was caught off-guard by the July rate cuts, which he said underscored government worries about slacking economic growth.
Growth for the broad money supply M2 so far this year has been below market expectations, and some analysts say bank lending has been weak in part due to dubious prospects for a global economic recovery that would support Chinese exports.
Nominal growth in fixed-asset investments fell 2.9% from the 2011 rate to 20.9% in the first quarter, said NBS. Nationwide industrial sales as measured by the ratio of sales revenue to total industrial output fell 0.4 percentage points in April from the previous month.
Steel, cement and power sales have been relatively weak as well, while all the nation's major industrial enterprises reported combined May profits of 390 billion yuan (USDCNY) , down 5.3% from the same period last year.
Also affecting enterprises is an ongoing develeraging process, said Liu Yuhui, chief of the Financial Focus Laboratory at the Chinese Academy of Social Sciences.
For example, apparently indebted customers including governments have been delaying payments to Jinxin Lighting Group in Dongguan, the company's assistant general manager Du Chunlin said. Moreover, he said, new orders have fallen up to 20% over last year's pace.
Meanwhile, financial pressures have increased for local governments that rely on developer demand for land. The China Index Academy said government-to-developer land transfers in 300 cities fell 38% to 652 billion yuan in the first half compared to the same period 2011.
Local governments have tried to improve the revenue picture by relaxing real estate policies within their jurisdictions and accelerating administrative approvals for new projects.
Bank lending divisions, however, are taking a more cautious approach to the local government financing platforms and real estate developers who were primary loan customers for years after the 2008 financial crisis.
CITIC Bank officials surveyed by researchers for the real estate management agency Centaline Property said they have been increasingly cautious about lending to developers. The bank capped developer loans at about 10% of this year's total lending and started preventing branches from writing loans without headquarters' approval.
Separately, China Merchants Bank officials told Centaline they've cut back loans to government financing platforms this year.
Meanwhile, some banks have responded to government incentives encouraging support for small companies by writing more loans. A survey by the investment advisory firm CEBM Group Ltd. found 60% of joint-stock banks questioned have increased loan outlays steadily month-on-month this year, particularly by extending credit to small and medium-sized enterprises.
Market expectations are rising for enterprises of all sizes that stand to benefit from government infrastructure spending. Recent CEBM interviews with commodities traders pointed to rising demand for iron, steel, and copper in July and even bigger improvements in August.