China’s slowing growth has triggered alarm bells, but analysts say government moves to further fine-tune monetary policy should be enough to stabilise the world’s second-largest economy.
China announced Friday its gross domestic product grew 7.6 percent in the second quarter, the slowest pace in more than three years.
Even before those figures came out, the government had already taken the unusual step of cutting interest rates twice in less than a month, and reducing reserve ratio requirements three times since December.
Analysts say policymakers may use those tools again, though much depends on how the rest of the world performs.
Qu Hongbin, HSBC chief economist for Greater China, based in Hong Kong, said Beijing should use a combination of monetary and fiscal policy as well as deregulation to stem the slowdown.
“It should be sufficient to stabilise growth to a modest recovery,” he said, expecting further steps this year to include up to four more reductions in bank reserve requirement ratios, which can spur lending, and another interest rate cut.
The prospect of a prolonged slowdown in China is unsettling after years of double-digit growth rates propelled the country up the global league tables to unseat Japan and become the world’s second-largest economy.
Job growth in the United States, the world’s largest economy, remains weak and the eurozone is still struggling with its sovereign debt crisis. Japan is doing better after last year’s disasters, though is not strong enough by itself to spearhead global expansion.
China is now the world’s biggest market for automobiles and the globe’s top exporter, among other superlatives. It’s a pillar of the global economy along with the United States, the European Union and Japan.
The ruling Communist party claims managing China’s economic rise as a major achievement and source of legitimacy. But party leaders now find themselves navigating choppy waters just months ahead of once-in-a-decade handover of power.
While GDP expanding in the seven percent range would be the envy of most economies, it has triggered alarm bells in China.
On Sunday, Premier Wen Jiabao said that while government efforts to stabilise the slowing juggernaut were working, the road ahead could be bumpy.
China’s “economic rebound is not yet stable and economic hardship may continue for a period of time”, Wen told an economic planning meeting in southwestern Sichuan province, the state Xinhua news agency reported.
He also suggested, however, that China’s potential remains high as “the basis for economic growth is good.”
Wen’s comments were his latest over the past few weeks expressing concern over the economy.
Yu Bin, an economist working for the State Council, or cabinet, said last week that while further monetary policy tweaks are an option, he expressed optimism their scope could be limited.
“If China’s economy gets stabilised gradually in the third quarter and even rebounds, and meanwhile the world economy maintains mild recovery, I think the room for further cuts on interest rates or reserve requirement ratio will be sharply narrowed,” he told reporters.
Li Wei and Stephen Green of Standard Chartered expect bank reserve requirement ratios to be lowered three more times this year and also see another interest rate cut.
They say stronger production of cement and steel products in June and higher bank lending are among factors heralding a better performance in the second half of the year.
“The economy will not come roaring back – but it will at very least stabilise and should regain a little bit of momentum,” they wrote in a report.
Chorching Goh, lead economist for the World Bank in Beijing, said that China’s leaders are not just looking at the economy’s performance over the short-run.
“They are quite serious about tackling some of the difficult issues over the next 5-6 years,” she said, citing the need for banking and other financial reforms as well as addressing social issues such as the country’s ageing population.
“They do plan to take the occasion of the leadership change to make bold changes,” she said. “I think the will is there.”