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China Economic Reform

China Q2 growth stable but economy may need official policy nudge

South China Morning Post | Wed,2016-07-06

China is set to register stable economic growth in the second quarter but momentum may remain weak, requiring further policy loosening to counter economic headwinds for the rest of the year, analysts said on Tuesday.

Ahead of economic data for the second quarter and June due out from this week, Premier Li Keqiang has twice said in the last few days that economic growth remained steady in the second quarter after a rise of 6.7 per cent in the first three months.

Though Li ruled out a hard landing in the economy, economists said momentum may have peaked in the second quarter and warned that Britain’s “Brexit” vote to leave the European Union might have a negative effect on China.

UBS said it expected growth to slow to 6.5 per cent in the fourth quarter. “As the uplift from previous policy easing diminishes gradually, property sales and new starts [will] likely normalise to a weaker pace,” it said in a research report.

“And private and manufacturing investment remains lacklustre due to subdued business sentiment and overhanging excess capacity issues – all set against a backdrop of lingering global economic and political ­uncertainties.”

Everbright Securities economist Xu Gao said Brexit had added uncertainty to an already slow global recovery and might further dampen the outlook for China’s exports and increase volatility in capital flows.

Employees at a clothing factory in Jining, Shandong province. Consumer inflation in June is expected to have moderated from May’s 2.0 per cent. Photo: Bloomberg

Employees at a clothing factory in Jining, Shandong province. Consumer inflation in June is expected to have moderated from May’s 2.0 per cent. Photo: Bloomberg

The yuan was under renewed depreciation pressure against the US dollar after the vote, having weakened around 1 per cent against the greenback in the last week of June and refuelling concerns of capital outflows.

But the People’s Bank of China said last week the yuan stayed stable against a basket of currencies, and ruled out devaluing the yuan to boost exports.

Nomura Securities said it expected one cut in benchmark interest rates and three cuts in banks’ reserve ratio, with one likely to come this month.

“We believe the PBOC remains open-minded to cutting banks’ reserve requirement ratio or the benchmark interest rate to counter the headwinds from a possible significant drop of economic growth and acceleration of capital outflows in the second half,” it said in a research note.

The official China Securities Journal also said fiscal policy was expected to be stepped up and the space for refining monetary policy expand in the second half, ­allowing more funding support to small business and cutting the reserve ratio if necessary.

It is broadly expected that consumer inflation in June, due out on Sunday, will have moderated from May’s 2.0 per cent, with food price rises continuing to lose steam and factory-gate producer price index deflation narrowing.

New loans were expected to rise above 1 trillion yuan (HK$1.16 trillion) in June, with one half tipped to be in the shape of mortgage loans, Citic Securities said. Weak corporate credit demand would persist.