China May Add to Reserve-Ratio Cuts as Europe Exports Weaken

Chinese Premier Wen Jiabao and officials meeting to map out economic policies for 2012 may be encouraged to add more stimulus as a shrinking trade surplus shows Europe’s debt crisis hitting exports.

Overseas shipments rose 13.8 percent in November from a year earlier, the weakest growth since 2009, according to customs data released Dec. 10 in Beijing. The excess of exports over imports fell by 35 percent.

The decline in the surplus and signs that capital has started to flow out of the country may prompt the government to keep cutting banks’ reserve requirements to sustain growth. Sliding exports to Germany and Italy weighed on gains in shipments to emerging nations, and President Hu Jintao yesterday marked 10 years in the World Trade Organization by warning that the global economy faces “severe” challenges.

“China’s capital outflows will continue and the trade surplus may shrink further, forcing the central bank to cut reserve ratios” and use bill sales to inject liquidity and bolster growth, said Shen Jianguang, a Hong Kong-based economist at Mizuho Securities Asia Ltd. “It’s very likely China will see a trade deficit in the next quarter,” said Shen, who previously worked at the International Monetary Fund and the European Central Bank.

Shares Drop

Stocks in China fell for a third day on concern a slowdown in growth is deepening and after the government said it will maintain property curbs next year. The benchmark Shanghai Composite Index dropped 0.5 percent to 2,304.80 at the 11:30 a.m. local-time break, set for the lowest close since March 2009.

The yuan was trading 0.08 percent higher at 6.3594 per dollar at 12:07 p.m. in Shanghai after the central bank set the strongest reference rate in a month. Investors have pared expectations for gains in the currency, with 12-month non-deliverable forwards dropping 0.5 percent last week.

Last month’s rise in overseas shipments compared with the 10.9 percent median estimate in a Bloomberg News survey and a 15.9 percent increase in October. Excluding distortions in January and February each year, the advance was the smallest since export growth resumed in December 2009. The expansion in imports slowed to 22.1 percent and the trade surplus narrowed more than estimated to $14.5 billion.

Europe Slows

Shipments to the European Union, China’s biggest market, rose 5 percent from a year earlier, a quarter of the pace reported in July and August. Sales to Germany, Europe’s biggest economy, fell 1.6 percent and those to Italy dropped for a third month. In contrast, exports to Malaysia rose 34.9 percent and those to Brazil gained 26.4 percent.

China Cosco Holdings Co., the nation’s largest operator of dry-bulk and container vessels, warned on Oct. 27 it will report a full-year loss as rates for carrying commodities and containers have plunged.

China’s economic expansion could decline to 7.5 percent in the three months through March from 9.1 percent in this year’s third quarter, as export growth slows and the government’s campaign to curb property prices damps investment, according to Nomura Holdings Inc. The country may post a $28.8 billion trade deficit next quarter, according to Zhang Zhiwei, the bank’s chief China economist in Hong Kong. That would be a record quarterly shortfall, according to data compiled by Bloomberg that goes back to January 1994.

Adding Liquidity

The central bank announced the first cut in lenders’ reserve requirements since 2008 on Nov. 30. Zhang estimates the ratio, now 21 percent of deposits for the biggest banks, will be lowered by 150 basis points in the first half of next year. Standard Chartered Plc last week raised its projection for the number of cuts by the end of 2012 to six from four, with the first coming by the end of this year, providing an extra 2.4 trillion yuan ($378 billion) of liquidity for banks.

Foreign-exchange reserves dropped in September for the first time in 16 months and continued to decline through early this month, Li Yang, a former central bank adviser, said Dec. 7, without specifying the source of his information.

A People’s Bank of China report last month showed financial institutions’ purchases of foreign exchange dropped in October, the first decline since December 2007, according to China International Capital Corp. Analysts watch the number for signs of so-called hot money flows.

Policy Fine Tuning

Purchases may remain low or even turn negative next year, reflecting further declines in the trade surplus, a slowdown in property investment and a worsening euro-area economy, Peng Wensheng, a Hong Kong-based economist with CICC, said in a Dec. 8 note.

Countries should strengthen monitoring of systemic risks, central bank Governor Zhou Xiaochuan said at a conference in Shanghai last week, according to a copy of his speech posted on the PBOC’s website yesterday.

The Communist Party’s Politburo, the 25-member body that oversees policy-making, said Dec. 9 it will “fine tune” economic policies next year “as conditions change,” and will make them more “targeted, flexible and forward-looking.” The nation will maintain a “prudent” monetary policy and a “proactive” fiscal policy, it said after a meeting chaired by President Hu Jintao, the official Xinhua News Agency reported.

Inflation Cools

The announcement preceded the annual economic work conference that maps out plans for development next year. It started today, the official Xinhua News Agency reported.

“The government is leaving its boilerplate language on policy unchanged,” London-based Capital Economics Ltd. said in a note. “In practice, easing has begun.”

Inflation cooled to 4.2 percent last month from a year earlier and industrial output growth weakened, according to statistics bureau data released Dec. 9, giving the government more room to loosen policies.

China’s trade surplus, a source of friction with nations including the U.S., has fallen from a peak of almost $300 billion in 2008. The commerce ministry said last month that it may be as small as $150 billion this year.

In a speech yesterday, President Hu pledged to “actively” expand imports to resolve imbalances with nations that have “substantial” deficits with China.

The excess may disappear within two years as domestic demand rises, making the yuan’s value less of an issue with trading partners, Li Daokui, an academic adviser to the central bank, said last month. The currency may even face depreciation pressure, he said in an interview.