Bloomberg News

China Risks 4-Point Growth-Rate Cut If Europe Worsens: Economy

February 06, 2012

Feb. 6 (Bloomberg) -- China’s economic expansion would be cut almost in half if Europe’s debt crisis worsens, a scenario that would warrant “significant” fiscal stimulus from the nation’s government, the International Monetary Fund said.

Based on the IMF’s “downside” forecast for the global economy, China’s growth could drop by as much as 4 percentage points from the fund’s current projection, which is for 8.2 percent this year, the organization said in a report released today by its China office in Beijing.

The outlook expands on the IMF’s warning last month that the world could plunge into another recession if Europe’s woes deepen. Premier Wen Jiabao reiterated last week his government will “fine-tune” policies to support growth amid the region’s debt crisis and the cooling domestic property market.

“China’s growth rate would drop abruptly if the euro area experiences a sharp recession,” the Washington-based IMF said. “However, a track record of fiscal discipline has given China ample room to respond to such an external shock.”

The government should cushion the impact of a deeper slowdown with measures including tax cuts that amount to about 3 percent of gross domestic product, it said.

Asian stocks climbed after data Feb. 3 showed employers in the U.S. added 243,000 jobs in January, exceeding the most optimistic estimates in a Bloomberg News survey. The MSCI Asia Pacific Index rose 0.4 percent as of 6:28 p.m. in Tokyo.

China’s economy is unlikely to experience a “hard landing” and the nation has room to boost fiscal spending, Anoop Singh, director of the IMF’s Asia-Pacific department, said last week in Washington. China should strengthen domestic consumption, he said.

Forecast Cut

The organization last month cut its 2012 forecast for China’s growth from an earlier estimate of 9 percent. It estimates expansion of 8.8 percent next year.

Singapore’s Prime Minister Lee Hsien Loong said China’s economy may have a “rough landing, but they will get through it,” in an interview that aired yesterday on CNN.

China’s GDP expanded 8.9 percent in the final three months of 2011 from a year earlier, the least in 10 quarters, and down from a 9.1 percent gain in the third quarter. Growth may slow to 7.5 percent this quarter, Nomura Holdings Inc. forecasts.

The IMF said in its report today that “monetary conditions should be fine-tuned to allow for some modest additional credit to the economy,” echoing Wen’s pledges last month. At the same time, “residual concerns about credit quality and bank balance sheets from the 2009-10 stimulus would mean that any monetary response to an unfolding European crisis should be limited,” the fund said.

Rate ‘Opportunity’

Slowing price gains in China “should be viewed as an opportunity to raise” inflation-adjusted interest rates on loans and deposits, so the cost of capital moves “closer to equilibrium” and household incomes increase, the IMF said. That would let the central bank “rely less on administrative limits on credit to achieve its monetary goals,” the fund said.

Chinese officials have held off a cut in lenders’ reserve requirements that banks including Barclays Capital Asia Ltd. had forecast for January and have also so far refrained from lowering interest rates to support growth. Wen said last month that curbs on the property market will be maintained to bring prices down to a reasonable level.

The IMF said China should target M2 money-supply growth of 14 percent this year, which the agency said would “strike the right balance” between supporting the economy and “being conscious of the credit overhang” and risks to banks.

M2 Expansion

M2, the broadest measure of money supply, expanded 13.6 percent in 2011, compared with a 16 percent target set by the government. The government has yet to announce a 2012 target.

Separately, Markus Ederer, the European Union’s ambassador to China, said today that the country may become the continent’s top export market this year, surpassing the U.S. “We simply see growth grates that most of us don’t see from any other major economic power,” said Friis Arne Petersen, the Danish ambassador to China. Both spoke at an EU briefing in Beijing.

In Australia, retail sales unexpectedly declined in December as consumers spent less at grocers and on dining out in an economy where employment growth stalled last year. The 0.1 percent drop from a month earlier was the first fall in six months, a report showed today. The median estimate in a Bloomberg News survey was for a 0.2 percent gain.

Indonesia’s economic growth exceeded 6 percent for a fifth straight quarter, a report showed today. GDP increased 6.5 percent in the three months through December from a year earlier, the statistics bureau said.

Taiwan Prices

Elsewhere in the Asian region, Taiwan’s consumer prices probably rose 2.2 percent in January from a year earlier, which would be the fastest pace in 23 months, another Bloomberg News survey showed ahead of a report due later today.

Asian officials are trying to weather the impact of the debt crisis in Europe, which has sapped global economic expansion and threatens to spark a recession in the 17-nation euro area. German factory orders may have climbed 1 percent in December from the previous month, when they slid the most in almost three years, a Bloomberg News survey showed before a report later today.

In the U.S., the trade deficit probably widened in December to a six-month high as imports climbed faster than exports, economists said a report this week will show.

The gap grew to $48.5 billion from the $47.8 billion shortfall in November, according to the median of 61 estimates in a Bloomberg News survey ahead of Commerce Department figures on Feb. 10. Consumer sentiment held close to a one-year high and firings were little changed, other reports may show.

Yuan Pressures

Today’s IMF report omitted providing new comments on the value of China’s yuan beyond saying that “upward pressures on the currency have diminished recently” and the “pace of reserves accumulation should resume this year.”

China’s foreign-exchange reserves, the world’s largest at $3.18 trillion, fell for the first time in more than a decade in the fourth quarter of 2011.

The IMF, in its annual assessment of China’s economy published in July, pressed for gains in the yuan, saying the currency “remains substantially below the level consistent with medium-term fundamentals.” In a report prepared for a Jan. 19-20 meeting of Group of 20 officials, IMF staff said the currency had been allowed to appreciate “faster than in the past.”

--Zheng Lifei. With assistance from Sunil Jagtiani in Singapore, Nicholas Wadhams in Beijing and Gregory Turk in Shanghai. Editors: Scott Lanman, Nerys Avery

To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net

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To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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