China’s slowdown may deepen as policy makers unwind the excesses of a record credit boom while only gradually increasing stimulus, leaving 2012 growth at the weakest in 13 years, Pacific Investment Management Co. says.
“The economy is unlikely to bottom until the third quarter,” Ramin Toloui, Pimco’s global co-head of emerging markets portfolio management in Singapore, said in e-mailed comments May 13. “Policy makers will progressively turn the dial toward more stimulus, but not in the aggressive manner of 2009,” restrained by the goal of tempering the credit-fueled property market, he said.
Pimco, which oversees the world’s largest bond fund, sees Chinese growth this year in the “mid-7 percent range,” a pace unseen since 1999. Its call is still lower than that of banks from Citigroup Inc. and JPMorgan Chase & Co. to Bank of America Corp. and UBS AG, which all pared their forecasts after April economic data were released last week.
A more measured pace of stimulus now than the record fiscal package and lending boom of 2009 may help reduce the risk of an eventual credit bust. China’s central bank has so far held off on lowering interest rates, opting May 12 to execute the third reduction in banks’ reserve requirements since November.
The reserve-ratio cuts are “meant to control the risk of a hard landing, not to avoid a soft landing,” said Stephen Jen, managing partner at SLJ Macro Partners LLP in London and former head of currency research at Morgan Stanley. “These monetary policies are reactive, very different from what some analysts had been expecting -- something much more aggressive and pre-emptive.”
Citigroup projects second-quarter expansion of 7.5 percent, down from a prior forecast of 7.9 percent, and full-year growth of 8.1 percent, compared with 8.4 percent, according to a research note yesterday. Mizuho Securities Asia Ltd. predicts growth of 8.3 percent this year, down from a prior forecast of 8.6 percent.
China’s growth rate slowed to 8.1 percent in the first quarter from 11.9 percent two years ago. During the global financial crisis, the weakest quarterly expansion was 6.2 percent in the first quarter of 2009, compared with a full-year rate of 9.2 percent. Justin Lin, chief economist at the World Bank, sees the nation’s growth averaging 8 percent over the next 20 years, Xinhua news agency reported.
Pimco’s Bill Gross, who runs the Total Return Fund, cut his holdings of emerging-market debt to a two-year low last month. The Shanghai Composite Index of stocks fell for a third day after reports on May 11 showed China’s industrial production and retail sales grew less than forecast. The gauge was down 0.8 percent as of 12:04 p.m. local time.
The data “highlight unequivocally the weakening growth momentum” in China, Citigroup said.
Chances of an interest-rate reduction are still “small at the moment,” Lu Ting, a Hong Kong-based economist at Bank of America, said in a May 12 research note. The government has left benchmark rates unchanged since an increase in July.
The People’s Bank of China said it will cut banks’ reserve requirement ratio by 50 basis points effective May 18. The reduction will inject about 400 billion yuan ($63 billion) of liquidity into the banking system, Australia & New Zealand Banking Group Ltd. estimates.
The pause of almost three months between the two reserve-ratio cuts this year, longer than investors expected, “shows the central government’s deep concern on bubble risks,” Yao Wei, a Hong Kong-based economist at Societe Generale SA, said in a research note yesterday. “Any easing measures will still be implemented in a much more cautious manner” than in 2008-2009, she said.
JPMorgan reduced its second-quarter expansion forecast to 7.8 percent from 8 percent and full-year projection to 8 percent from 8.2 percent. Monetary and fiscal policy have “so far been behind the curve,” economists led by Zhu Haibin said in a May 11 research note.
Standard Chartered Plc is forecasting another three cuts in the reserve ratio this year for a total of 150 basis points, from the current level of 20 percent for the biggest banks. The government will probably also relax loan-to-deposit ratio regulations to boost credit growth, Li Wei, a Shanghai-based economist with the bank, said in a May 12 note.
‘Plenty of Scope’
Stephen Roach, former non-executive chairman for Morgan Stanley in Asia, said China has “plenty of scope for easing” to boost growth, with an interest-rate cut likely to happen “sooner rather than later.”
“Chinese authorities have plenty of counter-cyclical ammunition to deploy,” said Roach, who now teaches at Yale University in New Haven, Connecticut.
51job Inc., a Shanghai-based recruiting service provider, and 7 Days Group Holdings Ltd., a hotel operator based in Guangzhou, last week pared sales forecasts. Shares of 51job fell the most since September on May 10, while 7 Days Group sank to the lowest since July 2010.
China’s policy makers are attempting to guide the economy and financial sector to a “dual soft landing” by moderating credit growth and unwinding the excesses of an investment boom during the global financial crisis without triggering a collapse, Toloui said.
Policy makers also probably want to keep some stimulus firepower in reserve for next year, the new leadership’s first full year in office, Toloui said. The Communist Party is scheduled to hold a once-in-a-decade power handover to a new generation of officials later this year in the aftermath of the ouster of Chongqing party boss Bo Xilai, which triggered the deepest political tensions since 1989.
“The policy response this time around is likely to be deliberate, incremental and reactive to incoming data on the economy and financial conditions,” Toloui said.