China Data Signals Economy May Need Urgent Policy Action
Chinese data dealt policymakers fresh blows on Friday as trade and new bank lending suggested pro-growth policies have been slow to gain traction and more urgent action may be needed to stabilise the economy.
Figures on Friday showing July exports rose just 1 per cent from a year ago and that new loans were at a 10-month low added to data on Thursday showing factory output rising at its lowest pace in three years and pricing power fading.
The first hard data of the third quarter has led some analysts to question the strength of what was expected to be the start of a shallow rebound in the economy after growth had slipped for six successive quarters.
“We think the central bank should move as quickly as possible to stabilise the economy. I expect there will be at least one more RRR cut and interest rate cut this quarter,” Xiao Bo, economist at Huarong Securities in Beijing, told Reuters.
Some economists say the central bank could move as early as this weekend to ease policy. It has reduced banks’ required reserve ratio (RRR) in three steps since November to free up an estimated EUR1.2 trillion (US$190 billion) for new lending and cut interest rates in June and July.
Net new bank lending in July of just RMB540 billion versus expectations of RMB690 billion is a big potential cause of concern. Bank loans are the main credit creation mechanism in the economy, which is only in the early stages of reforming capital markets to boost available sources of corporate finance.
The low figure adds to fear of faltering demand from China’s two biggest foreign customers – the European Union and United States – which had already seen economists peg back their consensus call for annual export growth to 8.6 per cent in a Reuters poll last week.
Excluding a fall in exports in January, the 1 per cent rise in July is the weakest since November 2009 and marked a big pullback from annual growth in June of more than 11 per cent, Reuters data shows. Shipments to the European Union dropped more than 16 per cent.
July imports rose 4.7 per cent from a year earlier, the weakest pace since April and also well short of expectations for an increase of 7.2 per cent.
Ahead of the data, China Vice Commerce Minister Gao Hucheng had told reporters it would be a challenge for China to meet its 10 per cent trade growth target in the second half of the year. The minister, Chen Deming, had said in June that China would be “lucky” to achieve the target.
China is not alone in feeling the pressure. Taiwan on Monday posted a fifth straight month of decline in exports in July, dragged down by double-digit drops in shipments to China, Europe and the United States, while South Korea’s July exports were the worst in nearly three years.
“Those looking for signs of resilience in China’s economic data were merely disappointed yesterday, but they are going to be distraught today,” Alistair Thornton and Xianfang Ren, economists at IHS Global Insight in Beijing, wrote in a client note.
“This complicates the prospects for an imminent recovery. With the export sector losing speed faster than expected, the government’s current investment stimulus plan looks woefully inadequate,” Thornton wrote.