China Likely to Introduce New Stimulus Measures

News, Cover Issue 476, July 5, 2010
Translated by Tony Liu
Original article: [Chinese]

China's economic outlook seminar, which is usually held in the middle of July every year by the State Council, was held at an earlier date this year at the end of June.

The advancement of the seminar date has negatively influenced market attitudes.

On June 30, a source who attended the seminar revealed its tone to the EO: "Everyone is worried about the next half of the year's economy."

In an interview with the EO, Yin Zhongqing, vice director of the Finance and Economic Committee of the National People's Congress said, "It is possible for China's macro-economy to rise drastically in 2010, but it also has the risk of decreasing drastically."

Due to concerns over the recent decline in economic indicators such as the purchasing manager index, urban fixed-asset investment, and real estate and automobile sales numbers, China is likely to launch a new round of economic stimulus measures.

People are no Longer Optimistic About the Second Quarter

After entering the second quarter, economic indicators have experienced a slight drop from the first quarter's development trend. With that in mind, officials at the National People's Congress Finance and Economic Committee and ministries and commissions expressed their concerns about the economy of the next half year.

The decline was first reflected in the purchasing manager index (PMI), an indicator for economic activity. According to the China Federation of Logistics and Purchasing (CFLP), compared with April's PMI, the PMI in May dropped 1.8 percentage points. Of the eleven PMI sub-indicators, ten presented a drop.

In addition, according to June's PMI released by the CFPL, the purchase price index decreased drastically from last month, especially the price index of raw materials stockpile which dropped to below 50 percent.

Furthermore, the indicator of added-value for large-scale industrial enterprises also slowed. The indicator's growth rate in May was 1.3 percentage points lower than April's; April's indicator was 0.3 percentage points below March's.

In addition, the urban fixed-assets investment in the first four months had a year-on-year decrease of 4.4 percentage points; the urban fixed-assets investment of the first five months were 0.2 percentage points below the first four month of this year.

What is more worrying is that the recent sales volumes of real estate and automobiles began to decrease. According to statistics released by the China Index Academy, of the 35 big cities monitored, housing sales in 14 cities decreased in May, and the sales of automobiles in May dropped 7.5 percent compared with April's sales.

Meanwhile, the degree of support from overseas demand to China's economic growth weakened. The trade surplus in the first four months of this year fell 78.6 percent from a year earlier, and the trade surplus in the first five months experienced a year-on-year drop of 69.9 percent.

Over the past month, Yin Zhongqing has investigated many places in China. He told the EO "In the past month, especially after April and May's economic figures were released, many people have become pessimistic."

Institutions Lower Forecasts for Economic Growth

Domestic and foreign investment banks and economists have begun downgrading their forecasts for China's economic growth.

He Jiming, chief economist at China International Capital Corporation thought China's economic growth rate would decline to some 8 percent.

Liu Yuanchun, vice president of the School of Economics at China's Renmin University, told the EO, "The risks to China's economic growth in the fourth quarter will increase."

Wang Tao, chief China economist at UBS said, "Economic growth has peaked. Due to the impact from the slow-down of infrastructure and real estate investment and the fact that exports are likely to decline starting in the third quarter, economic growth will begin to slow down after the second quarter."

"We predict that the GDP growth rate will decline to 8.5 percent in the fourth quarter and the economy growth rate for the year will be 10 percent." Wang added.

Uncertain Policies

Although many officials and economists hold pessimistic attitudes toward the economy of the next six months, they disagree on the government's possible macro-control policy.

Yin Zhongqing admitted that he was uncertain about some issues: "I am not sure whether our government puts too much stress on economic growth or not. If the government made the mistake of overreacting to the crisis of this past year, I am worried that the same mistake may occur in the next half of this year."

"If the economic indicators in the third quarter do not perform well, the government will likely adopt many new policies." Yin added.

He did not think the present economic situation is a sign of a double dip. HFe suggested that the government gradually withdraw the stimulus package, even if facing the risk of a double dip.

Dong Xian'an, chief macro-economy analyst at Industrial Securities, thought due to the second quarter's economic figures, a change in policy will happen soon.

He said in the future, government economic policy will likely focus on four areas: First, the government will unveil a stimulus policy including subway, highway and other infrastructure projects; the second area of focus will be new consumption stimulus measures; the third will be the further encouragement of private capital investment; and the fourth will be further pushing the reform of the RMB exchange rate.

Wang Tao held that China's economy would achieve a soft landing in the next year and that inflation would be relatively moderate. She does not think the government will carry out any new and significant tightening policies.

This article was edited by Rose Scobie