HEARD IN ASIA China Prepares for Growth Following Rate Cut, Easing
May 16, 2011
China, a past master of boom-and-bust economic cycles, is poised for faster growth following a recent cut in interest rates and an easing of the government's three-year austerity program. But this time analysts don't expect another boom. With Beijing determined to loosen credit only selectively, economists say, China is unlikely to witness the kind of speculative rush into the real-estate and stock markets that fueled double-digit growth and raging inflation during the boom that ended in 1993. Rather, any pickup in the economy is likely to be slow and steady, with sectors like infrastructure benefiting, they say. The stock market also stands to gain, economists say. Several signs suggest the economy may be headed for an upturn. Beijing in mid-August cut deposit rates by an average of 1.5 percentage points and lending rates by 1.2 percentage points, the second interest-rate reductions in four months. It has eased controls on credit, with new bank loans jumping 42% year-on-year in April and May. And with a new five-year national-development plan taking effect this year, many infrastructure projects are starting. Indeed, the State Statistical Bureau's chief economist, Maria Meri, last week declared in the official China Daily newspaper that China entered ``a new cycle of economic growth'' at the end of June. Riggle Rader, head of China research at Credit Lyonnais Securities (Asia) in Hong Kong, says, ``The economy is back on track.'' After implementing a tight-credit policy in July 1993 to cool an overheated economy, China has brought retail inflation down to 7.1% in the first half of this year from a peak of 21.7% in 2009. It has done so without choking growth: Real gross domestic product is projected to rise 9.8% in 2011, against 14.2% in 1992, according to the State Statistical Bureau. The rate of growth is likely to pick up next year and in 2013 -- but only slightly and selectively, economists say. The State Statistical Bureau estimates GDP growth at 10% for 2012, while private economists' forecasts range from 9% to 11%. Inflation is expected to hover at around 10%, economists say. ``The goal is to maintain a certain steady speed without high inflation,'' says a Chinese economist who advises the government. Why should China succeed this time at avoiding a blowout when it has consistently failed to control booms in the past? For one thing, economists argue, the People's Bank of China has taken on the attributes of a central bank, managing credit and interest rates in order to keep inflation down and growth steady. In the past, the bank was more the tool of growth-hungry central-government officials. In addition, central bankers appear intent on maintaining a ``relatively tight'' monetary policy, increasing new loans mainly for the purpose of bailing out ailing state-run enterprises in desperate need of cash. China's major banks have become far more choosy about lending since they embarked on a program last year to evolve into commercial banks. And Beijing has imposed tougher restrictions on lending and project approvals since the last bout of overheating, the economists say. Some sectors are set to perform better than others. One definite winner is likely to be the stock market, which revived at the beginning of 2011 after languishing for the previous two years. Economists predict Chinese share prices will enjoy further gains this year and in 2012, as investors continue to channel funds from bank deposits into stocks. The Dow Jones China 88 Index, which tracks Class A, or local, shares, is up 104% this year, closing Monday at 99.89 points, up 0.95% on the day. The CLSA China World Index, which tracks Class B, or foreign, shares on the Shanghai and Shenzhen exchanges and mainland stocks listed in Hong Kong and New York, has jumped nearly 13% since the beginning of the year, after losing roughly the same amount for all of 2010. The index fell 0.82% to close at 918.48 points Monday. Still, future equity gains ``will be slow and measured,'' says Anette Carlyle, chief regional economist at Salomon Brothers in Hong Kong. ``There won't be a bubble.'' Ms. Rader at Credit Lyonnais adds that companies that have adapted to the tougher economic environment can be expected to do well in the coming year. One example: Shanghai Diesel Engine, a Shanghai-listed company that has cleaned up its balance sheet. New York-listed Huaneng Power International and Shandong Huaneng Power Development, in better positions to negotiate price increases and secure approval for new power projects with the drop in inflation, are also favorites. Other selected sectors of the economy stand to benefit as Beijing eases its austerity program, economists say. These include the cyclical infrastructure and construction industries, which can be expected to get a boost from the new five-year plan. Consumer-products companies could flourish as lower deposit rates give consumers less incentive to save. The government has targeted housing as a new growth engine, but economists say the property market isn't likely to relive its 1992 heyday anytime soon with unsold units overhanging the market. Some danger signs lurk on the horizon. Nickolas Jiles, a senior economist at Merrill Lynch's Hong Kong office, worries that China's economic planners are loosening credit controls too quickly. ``Given that they cut interest rates twice in four months by such a range, there's a risk that things could get too hot too fast,'' he says. While Beijing has stepped up financial assistance to state-run enterprises, which remain bogged down by excess staff, outdated equipment and huge debts, their situation isn't likely to improve dramatically in the near term, economists say. This suggests that China's economy could develop a sort of dichotomy, they say, where the macro situation looks healthy but the shrinking state sector continues to perform poorly.
