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China Central Bank Adviser Forecasts Growth Slowdown to 7.4%

China Central Bank Adviser Forecasts Growth Slowdown to 7.4%
A Shanghai Zhenhua Heavy Industry Co. Ltd. (ZPMC) ship delivers new container cranes to the Port of Long Beach. Surveys of manufacturing purchasing managers indicate that China's export growth may slow in coming months. Photographer: Tim Rue/Bloomberg

A Chinese central bank adviser predicted the nation’s expansion may cool to 7.4 percent this quarter, adding to concern that the world’s second-biggest economy has yet to bottom out.

Song Guoqing, an academic member of the People’s Bank of China monetary policy committee, also warned that a decline in producer prices in tandem with consumer inflation may hurt investment returns of industrial companies, damping their desire to expand.

China’s economic growth slowed to 7.6 percent in the three months ended June, the sixth straight deceleration, as Europe’s fiscal crisis sapped exports and a crackdown on property speculation curbed domestic demand. Premier Wen Jiabao said the momentum for a recovery isn’t yet in place, according to a July 15 Xinhua News Agency report, and warned two days later that the labor situation will become more “severe.”

“The consensus is that China’s economic growth rate will be close to 8 percent in coming months, but I personally am more pessimistic because there are problems on the export side,” Song said at a forum in Beijing on July 21. With Europe’s debt crisis still unfolding, “there is a risk of insufficient government measures if Chinese exports fall more sharply than expected in coming months,” he said.

Song’s forecast of a seventh straight quarterly slowdown in growth would match the streak during the global financial crisis, albeit not as deep. He spoke at a forum held by Peking University’s China Center for Economic Research where he is a professor specializing in China’s economy and inflation.

Growth Target

A survey by the center of 22 domestic and foreign banks and institutions had a median forecast for third-quarter expansion of 7.8 percent, with Song’s estimate the second lowest.

Song, who studied economics at the University of Chicago from 1991 to 1995, was appointed one of three academic advisers to the central bank in March when the two-year term of his predecessors ended. He was a “special consultant” to Goldman Sachs Group Inc.’s China venture, Gaohua Securities Co., from 2007 until he took up his position with the PBOC.

Premier Wen in March set a 2012 growth target of 7.5 percent, down from the 8 percent goal in place since 2005, saying the nation needs to shift to a more sustainable and efficient economic model.

China’s overseas sales in the first half of the year rose 9.2 percent, while imports gained 6.7 percent, putting the government at risk of missing its goal of 10 percent expansion in trade this year.

‘Effective Stimulus’

Export growth may slow in coming months, surveys of manufacturing purchasing managers indicate. A June survey released July 2 by HSBC Holdings Plc and Markit Economics showed new export orders fell at their steepest pace in more than three years while a separate index released by the government a day earlier showed overseas demand contracted for the first time since January.

China’s economic slowdown “could worsen in the second half if Beijing is not decisive in unwinding some outdated tightening measures and carrying out effective stimulus,” Lu Ting, a China economist at Bank of America Corp. in Hong Kong, said in a July 19 note. The government should introduce measures equivalent to 1 percent of gross domestic product, about 470 billion yuan ($74 billion), “to fill the gap generated by slowing exports and fixed-asset investment,” he wrote.

The government will be “prudent” with any stimulus, Song said. “Prudence can be good as it can avoid big swings,” he said. “But in an economic slowdown it may also lead to insufficient measures.”

Willingness to Invest

Signs of weakening domestic demand include falling factory-gate prices and softening inflation. The producer price index dropped 2.1 percent in June from a year earlier, the fourth straight decline, while consumer prices rose 2.2 percent, the smallest increase since January 2010.

The combination has lowered investment returns for Chinese industrial companies, Song said. “This is not only a problem for monetary policy, but also the willingness of companies to invest.”

If the situation persists for a “long period” of one to two years, it will be “very tough” for companies, Song said.

Angang Steel Co., China’s largest Hong Kong-traded producer of the alloy, said July 6 that it probably swung to a loss in the first half after prices plunged. The cost of steel fell this month to the lowest in two years.

Reduce Taxes

First-half profit declines at hundreds of Chinese companies may increase pressure on the government to reduce corporate taxes as part of efforts to stem the economy’s slowdown. Net income fell from a year earlier for more than half of 760 listed companies to report results, worse than in the first six months of 2009, Societe Generale SA said in a July 19 note.

Moderating inflation has given the central bank more room to ease monetary policy. It announced the second reduction in interest rates in a month on July 5 and has lowered the proportion of deposits banks must set aside as reserves three times since it started cuts in November to boost lending.

The central bank is “very likely” to further lower banks’ reserve-requirement ratio, Song said, without saying when he expects an announcement. It is “very difficult to make a forecast” on interest rates as the PBOC needs to look at “timing and conditions,” he said.

China’s borrowing costs are still “relatively high” in the context of falling producer prices, Song said. The benchmark one-year lending rate is 6 percent after the latest cut and banks are allowed to offer discounts of as much as 30 percent.

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