China cen­tral bank un­der mount­ing pres­sure to ease pol­icy

The Pak Banker - - COMPANIES/BOSS -

China is un­der grow­ing pres­sure to fur­ther stim­u­late its econ­omy af­ter dis­ap­point­ing data over the week­end showed another heavy fall in fac­tory-gate prices and a sur­prise slump in ex­ports.

Pro­ducer prices in July hit their low­est point since late 2009, dur­ing the af­ter­math of the global fi­nan­cial cri­sis, and have been slid­ing con­tin­u­ously for more than three years.

Ex­ports tum­bled 8.3 per­cent in the same month, their big­gest fall in four months, as weaker global de­mand for Chi­nese goods and a strong yuan pol­icy hurt man­u­fac­tur­ers.

"Pol­icy fo­cus is def­i­nitely the (pro­ducer) de­fla­tion at this stage," said Zhou Hao, economist at Com­merzbank AG in Sin­ga­pore.

He said China's cen­tral bank would likely need to fur­ther cut in­ter­est rates again, hav­ing al­ready cut four times since Novem­ber in the most ag­gres­sive eas­ing in nearly seven years.

The gloom may only deepen in the com­ing week with a raft of eco­nomic data forecast to show re­newed weak­ness in fac­to­ries, in­vest­ment and do­mes­tic spend­ing.

The world's sec­ond-largest econ­omy is of­fi­cially tar­geted to grow at 7 per­cent this year, still strong by global stan­dards, but some econ­o­mists be­lieve it is grow­ing at a much slower pace.

Econ­o­mists ex­pect the cen­tral bank to cut rates by another 25 ba­sis points this year, and fur­ther re­duce the amount of de­posits banks must hold as re­serves by another 100 ba­sis points, ac­cord­ing to a Reuters poll last month.

The pro­ducer price in­dex fell 5.4 per­cent from a year ear­lier, the Na­tional Sta­tis­tics Bureau said on Sun­day, com­pared with an ex­pected 5.0 per­cent drop. It was the worst read­ing since Oc­to­ber 2009 and the 40th straight month of price de­cline.

Fall­ing pro­ducer prices are wor­ry­ing be­cause they eat into the prof­its of min­ers and man­u­fac­tur­ers and raise the bur­den of their debts. China's cor­po­rate debt stands at 160 per­cent of gross do­mes­tic prod­uct, twice that of the United States, ac­cord­ing to a Thom­son Reuters study of over 1,400 firms.

In line with the slug­gish econ­omy, an­nual con­sumer in­fla­tion re­mained muted at 1.6 per­cent de­spite surg­ing pork prices, in line with fore­casts and slightly higher than June's 1.4 per­cent.

A cool­ing hous­ing mar­ket, un­even ex­ports and weak in­vest­ment have cooled an­nual eco­nomic growth, which will be slow­est in a quar­ter of a cen­tury even if it hits Bei­jing's tar­get this year.

A strong yuan pol­icy - de­signed in part to sup­port do­mes­tic con­sump­tion and help Chi­nese firms to bor­row and in­vest abroad - is hurt­ing ex­porters. Trade data on Satur­day showed de­pressed de­mand from Europe and the first drop in ex­ports to the United States, China's big­gest mar­ket, since March.

Chi­nese firms have laid off work­ers for 21 con­sec­u­tive months as they slash prices to a six-month low to at­tract cus­tomers, an of­fi­cial sur­vey showed this month.China's tur­bu­lent stock mar­kets, which have fallen by al­most a third since peak­ing in June, also add a new sense of ur­gency for top of­fi­cials as they try to en­sure a sta­ble fi­nan­cial sys­tem can fund Bei­jing's ef­forts to rekin­dle eco­nomic growth.

Yet, even the cen­tral bank has warned that looser pol­icy may not be ef­fec­tive in less­en­ing the pain felt by com­pa­nies. Com­pa­nies are hold­ing back on spend­ing amid a re­luc­tance by banks to lend due to ris­ing bad debts.

"Main­tain­ing a growth rate of 7 per­cent in the sec­ond half of the year will be a chal­lenge," ANZ Bank said in a note at the week­end. "Mon­e­tary pol­icy will need to be­come more sup­port­ive."

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