China Slowdown Seen Longer Than in Crisis by State Economist

China Slowdown Seen Longer Than 2009 by Government Researcher
A Chinese flag flies on a vessel moving past shipping containers being unloaded at a Tianjin Port Group Co. dock in Tianjin, China. Photographer: Nelson Ching/Bloomberg

China’s economic slowdown may last longer than during the global financial crisis because of worsening external demand and limited lending to smaller companies, a state researcher said.

Growth may slow for a ninth straight period to below 7 percent in the first quarter, Yuan Gangming, an economist with the Chinese Academy of Social Sciences, said in an interview Sept. 19 in Beijing. Yuan, who formerly headed CASS’s Office of Macroeconomic Research in the Institute of Economics, forecast 7.4 percent expansion in the third quarter and 7.2 percent in the last period of the year.

The slowdown may pressure new leaders of the Communist Party, set to be named this year in a once-a-decade power handover, to step up stimulus efforts. A report yesterday showed China’s manufacturing may contract for an 11th month, and Yuan said the central bank has been too focused on controlling inflation at the expense of growth.

“The slowdown will definitely extend into the first quarter of next year,” said Yuan, 58, who advises the government without being directly involved in policy making. “That will provide a good starting point for the new generation of leadership to make a turnaround, because things can’t get worse.”

The Shanghai Composite Index rose 0.5 percent as of 11:14 a.m. local time, paring the benchmark’s steepest weekly drop since October.

Stimulus Package

With the 2008 crisis, China enacted a 4 trillion yuan ($586 billion at the time) stimulus and opened up bank lending to revive expansion. Year-over-year growth, after decelerating for seven quarters, bottomed at 6.2 percent in the first quarter of 2009 and accelerated to 11.9 percent a year later.

Economists surveyed by Bloomberg News this month, in contrast with Yuan, see growth rebounding next quarter. The median estimates for expansion were 7.4 percent for the third quarter, 7.7 percent in the fourth quarter and 7.9 percent in the first period of 2013.

Data for the past two months point to a deepening slowdown in the world’s second-biggest economy after growth decelerated to a three-year-low of 7.6 percent last quarter. Even so, the People’s Bank of China has held off from easing after cutting interest rates in June and July and lowering lenders’ reserve requirement ratio three times from November to May.

Policy Paralysis

The Communist Party has yet to announce a date for the congress this year that will start the process of the leadership handover. Lu Ting, chief Greater China economist at Bank of America Corp., said this month that the nation had “policy paralysis” as a result of the pending transition.

Yuan, who also teaches at Tsinghua University in Beijing, said unsustainable local-government spending plans will also contribute to the slowdown.

“China’s medium and small-sized businesses are finding it increasingly hard to borrow money from banks -- the most fundamental part of the economy is suffering,” Yuan said.

The nation’s target for 14 percent growth in the M2 money supply this year is helpful to keep inflation in check yet too low to accommodate accelerated growth, Yuan said.

The U.S. Federal Reserve’s decision last week to start a third round of large-scale asset purchases “may not necessarily lead to big capital inflows into China,” Yuan said. “If the markets in the United States are performing better than China’s, why should investors bother to come to China?”

Stock Gauges

The U.S. benchmark Standard & Poor’s 500 Index is up about 22 percent in the past year while China’s Shanghai Composite Index has dropped 17 percent.

Banks and brokerages cutting their gross domestic product forecasts this month include UBS AG, Morgan Stanley and Barclays Plc, who predict growth will sink to a 22-year low of 7.5 percent this year.

Chinese Premier Wen Jiabao, who pledged last week to employ monetary and fiscal policies to spur growth, has accelerated infrastructure-project approvals while refraining from introducing a stimulus package on the scale of the one during the financial crisis.

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