China May Soften Policy as Li Talks of Limits, Nomura Says

China may soften its stance on monetary policy after Premier Li Keqiang said the nation’s economic growth and employment must stay above a certain floor, Nomura Holdings Inc. said.

Li said policy should ensure that economic activity moves within a reasonable range, while inflation should be kept below a ceiling, according to a Xinhua News Agency report posted on the government’s website yesterday, without giving precise limits. Citigroup Inc. took a different tack, saying Li’s remarks were in line with its view that the government has no plans for stimulus at the current expansion pace.

China’s exports and imports unexpectedly declined in June, underscoring the severity of a slowdown in the world’s second-largest economy as Li’s attempts to rein in credit growth contributed to the worst cash crunch in at least a decade. Gross domestic product may grow 7.5 percent in the second quarter, down from 7.7 percent in the first, according to the median estimate of 40 economists in a Bloomberg survey.

“This may indicate that he is feeling more pressure as the economic data continue to weaken and the risks that China may not be able to achieve its 7.5 percent growth target for 2013 rise,” Zhang Zhiwei, Nomura’s Hong Kong-based chief China economist, wrote in a note today. “The likelihood of policy fine-tuning is rising in the short term.”

Balance Objectives

China should balance policy objectives including economic restructuring, reining in inflation and preventing risks, Li said after meeting the governors of five provinces.

Ding Shuang, senior China economist at Citigroup in Hong Kong, said yesterday that Li’s comments were “in line with our assessment that the government does not plan to introduce stimulus at the current pace of growth.” He said it’s “our understanding” that the lower bound of Li’s range refers to quarterly expansion below 7 percent and a “significant worsening of the labor market.”

Chinese stocks rose 3.2 percent at the close, the most since December, on speculation the government will take measures to bolster economic growth. Ping An Bank Co. surged by its 10 percent daily limit to 10.34 yuan and Poly Real Estate Group Co. gained 6.1 percent to 11.32 yuan.

China’s statistics bureau is scheduled to release economic-growth data for the second quarter on July 15.

“People interpret Premier Li’s speech yesterday as ‘pro-GDP’ growth, which may mean looser monetary supply, which in turn should benefit the housing market,” Du Jinsong, a Hong Kong-based analyst at Credit Suisse Group AG, wrote in an e-mail.

Qu Hongbin, chief China economist at HSBC Holdings Plc in Hong Kong, said in a report today that he expects “some moderate fiscal and monetary measures,” including spending on public housing, to put a floor under China’s slowdown. He put the lower bound of acceptable growth at “around 7 percent.”

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