Don't panic about China's slow­down, Gold­man says

The Pak Banker - - MARKETS/SPORTS -

China's growth is poised to de­cel­er­ate this quar­ter and the road ahead will be bumpy. But don't panic, says the most ac­cu­rate fore­caster on the na­tion's econ­omy.

Growth will slow to 6.7 per­cent in the first three months of this year as fi­nan­cial ser­vices con­trib­utes less to the ex­pan­sion than a year ago and be­cause pol­icy mea­sures to sup­port growth have tapered off from the last quar­ter of 2015, says Song Yu, Bei­jing-based chief China econ­o­mist at Gold­man Sachs Gao Hua Se­cu­ri­ties Co. and the best over­all fore­caster of China's econ­omy ac­cord­ing to Bloomberg Rank­ings for the past two years.

Even though full-year growth will drop to 6.4 per­cent in 2016 as wages, em­ploy­ment and con­sump­tion "take a hit," Song says he's not neg­a­tive about China's eco­nomic prospects and dis­misses dire pre­dic­tions of a com­ing col­lapse. "Some peo­ple are mak­ing ex­treme ar­gu­ments to say the whole ma­chine is not work­ing," said Song. "That's not what we see. Over­all, the plane is mov­ing in the di­rec­tion it should be and it's broadly un­der con­trol."

Pol­icy mak­ers have stepped up sup­port for the econ­omy, with the cen­tral bank Thurs­day guid­ing in­ter­est rates lower by of­fer­ing to re­duce the medium-term bor­row­ing cost it charges lenders, ac­cord­ing to a per­son with di­rect knowl­edge of the mat­ter. The na­tion's chief plan­ning agency has also made more money avail­able for lo­cal in­fra­struc­ture projects. Data re­leased Thurs­day il­lus­trated the room for pol­icy eas­ing, as de­fla­tion at the na­tion's fac­to­ries ex­tended for a record 47th straight month in Jan­uary. Con­sumer price in­fla­tion picked up, led by food costs ahead of the week-long Lu­nar New Year hol­i­day.

Fig­ures pub­lished Mon­day un­der­scored the chal­lenges the world's largest trad­ing na­tion is fac­ing, as im­ports plunged 18.8 per­cent in Jan­uary from a year ear­lier in U.S. dol­lar terms and ex­ports dropped 11.2 per­cent.

The down­ward tra­jec­tory of growth is set to con­tinue in the next two years, but there's no rea­son to panic be­cause pol­icy mak­ers have both am­ple scope to sup­port growth and can also un­leash new growth driv­ers, he said.

When growth slows, "pol­icy mak­ers will come up with some­thing," he said. "Eas­ing has been enough to gen­er­ate mini ups along a down­ward trend," he said. "And they could have done more. But they chose not to do more and that's im­por­tant. They re­served ammo. They want to leave some ammo to pro­tect them­selves from ex­treme tail risk." Song likens the econ­omy to a per­son who's in con­straints, with re­stric­tions such as bank re­serve ra­tio re­quire­ments that are among the world's high­est.

"He has ropes and chains all over him and he still walks at one mile per hour," he said. "That's not the same as a guy who is on drugs and he still can only walk at 1 mile per hour. If China hits some bumps, it just un­ties some more ropes." It did just that this month, al­low­ing banks to cut the min­i­mum re­quired mort­gage down pay­ment to 20 per­cent for first-home pur­chases, the low­est level ever, from 25 per­cent. Mean­time, China's cab­i­net has dis­cussed low­er­ing the min­i­mum ra­tio of pro­vi­sions that banks must set aside for bad loans, a move that would free up ad­di­tional cash for lend­ing.

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