Bumpy road for China’s economy

Growth slows as financial services and exports plunge year-on-year, say economists

BEIJING: China’s growth is poised to decelerate this quarter and the road ahead will be bumpy.

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 last year, said Song Yu, economist at Goldman Sachs 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 this year as wages, employment and consumption “take a hit,” Song said he was not negative about China’s economic prospects and dismissed dire predictions of a 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.”

Policymakers have stepped up support for the economy, with the central bank 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 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 on Monday underscored the challenges the world’s largest trading nation is facing, as imports plunged 18.8 percent last month from a year earlier in US 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 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.”

Meanwhile, China’s cabinet has discussed lowering the minimum ratio of provisions banks must set aside for bad loans, a move that would free up additional cash for lending.

Song said after a period of stabilisation, policy makers would again probably guide the yuan carefully down once more. He estimated it would depreciate to 7 to the dollar by the end of this year and to 7.3 by the end of next year.

“We think a 10 percent depreciation or modestly more would be enough to reach a point not too far from the equilibrium level,” he said.

The ranking of economic forecasters is based on the last two years of data and uses estimates submitted to Bloomberg for nine key indicators that include growth, exports, imports, fixed-asset investment and consumer and producer prices. – Bloomberg

PICTURE: REUTERS HARD TIMES: A vendor in her shop in a market in Beijing this week. China’s consumer inflation quickened in last month due to rising food prices while producer prices declined for a 47th straight month, as falling commodity prices and weak demand add to...