China's leaders started to reach into their economic-stimulus toolkit this weekend to boost flagging growth, but the measures don't pack the wallop they once had.
After China announced a slew of disappointing economic indicators Friday--from industrial production to housing to domestic spending--the People's Bank of China said Saturday evening that it would lower the share of deposits that banks must hold in reserve by 0.5 percentage point, starting May 18.
The cut is aimed at kick-starting lending, but banks already appear to have ample credit, with interbank lending rates falling to 3.2% on Friday, down from a high of 5.4% in the second half of February. Song Yu, a Goldman Sachs analyst, said that lowering the reserve-requirement ratio to 20% was simply a 'signaling device used by the government to show its willingness to loosen policy,' and wouldn't itself have much effect on the economy.
Friday's data showed that the economy was continuing to lose steam in the second quarter and might not rebound as China's leaders and market analysts had widely expected.
China is widely seen in the West as able to boost growth as easily as a motorist stepping on a gas pedal. As its government is authoritarian, the country doesn't need to negotiate with the public or a parliament. With relatively low debt levels, it can afford additional spending. China sailed through the global recession of 2008 and 2009 as a result of a massive lending and spending program.
But Beijing has its own constraints that reduce its ability to maneuver. The immense stimulus program worsened a housing bubble and ratcheted up local-government debt, making leaders wary of undertaking another large-scale stimulus plan. Cutting interest rates, a favorite tool of central banks globally, is problematic because it could worsen the inflation that China's central bank spent the last year trying to tame.
Further inhibiting action: a once-in-a-decade leadership transition, already marred by the turmoil over the sacking of Politburo member Bo Xilai. Analysts argue that the importance of ensuring a smooth transition raises the chances that China's leaders will act to buoy growth, but it may also make it tougher for rival factions to agree on bold steps.
'Chinese policy makers face a conundrum as a sharp burst of credit expansion is likely to be most effective at boosting growth but would set back financial-system reforms and rebalancing of the economy,' said Brookings Institution China specialist Eswar Prasad. 'Fiscal stimulus, if carefully targeted, has a better chance of achieving both short-term and long-term goals. But its efficacy may be limited if rising economic uncertainty dampens consumer and business confidence.'
China's economy grew at 8.1% in the first quarter from a year earlier, its slowest pace since the spring of 2009, and analysts had widely expected a rebound in the current quarter. But that now looks unlikely, and several downgraded their forecasts. Wang Tao, China economist at UBS, lowered her forecast for second-quarter gross domestic product growth to 8% year-to-year, down from 8.4% before the April data were released.
Low public debt means that China's government has scope to ratchet up spending, or cut taxes, to support growth. China's ratio of government debt to GDP in 2011 was 25%, according to the International Monetary Fund, compared with 102% in the U.S. Even accounting for local-government debt, which Premier Wen Jiabao recently put at CNY10.7 trillion at the end of 2011, or 22% of GDP, China's public finances look relatively healthy. Falling inflation, with the consumer price index edging down 0.1% in April from March, also means there is scope to do more.
Bank of America economist Lu Ting argues that Beijing could 'spend more on social welfare and quicken constructions of social housing and infrastructure.' But increasing public spending isn't straightforward. The government already has scaled back the pace of social housing construction because of concerns that local governments couldn't make ambitious targets. A reversal of controls on the housing sector might provide the quickest cure for China's growing pains. But it would be an embarrassing turnaround for the government. Senior leaders from Mr. Wen down have made pricking the housing bubble a centerpiece of the policy agenda. Property prices have so far fallen only very slightly from their highs, leaving the problem of housing affordability unsolved.
After three years of high investment, the low-hanging fruit on infrastructure projects has already been picked. Selecting financing for new programs takes times and may not produce a quick economic boost. 'They won't panic, but they will look around the cupboard and see what is there,' said Stephen Green, China economist at Standard Chartered.
Indeed, a number of the measures likely to be considered to boost growth--slowing the rate of appreciation of the yuan to help exporters, cutting interest rates to boost demand, investing more in infrastructure--have another downside. They would slow what China's leaders have long acknowledged is a needed shift in economic strategy so that China relies more on domestic demand and less on investment and exports.
Nicholas Lardy, a China expert at the Peterson Institute for International Economics, argues that interest rates--at least for depositors--should be increased to pad the wallets of ordinary consumers. 'Over time, higher rates would probably reduce the household saving rate, giving a further boost to domestic consumption,' he said. But few governments are willing to raise bank rates at a time when the economy is slowing.
To compensate, higher-income households have been shifting their savings into wealth-management products, typically short-term investment products, which offer significantly higher interest rates than what the central bank allows banks to offer on ordinary deposits. For China's small and midsize banks, many of which serve the country's smaller privately owned businesses, fewer deposits has meant less money available to lend.
In March, Premier Wen lowered the country's growth target to 7.5% from the 8% goal it had since 2005. The new objective, though, wasn't intended literally--China's economy regularly grows far faster than its stated target. Instead, say China experts, the goal is meant as a signal to provincial and local leaders that the central government wanted to shift economic strategy, even if that meant a reduction in the pace of growth. Consumption is seen as a firmer foundation for growth over the long term.
Now, though, China is in danger of slipping closer to the stated target, prompting the government to search for alternatives to speed up growth. -By Bob Davis and Tom Orlik, The Wall Street Journal
布鲁金斯学会(Brookings Institution)中国问题专家普拉萨德(Eswar Prasad)说，中国决策者目前面临两难境地，大规模信贷扩张可能是提振经济增长最为有效的方式，但这样做会给金融系统改革和恢复经济平衡拖后腿。如果能够悉心制定财政刺激措施，则更有可能实现长短期两个目标。然而一旦消费者和商业信心受到经济方面不确定性的打击，那么财政刺激措施的有效性就会受到限制。
美国银行(Bank of America)经济学家陆挺称，中国可以增加社会保障支出，加速保障房和基础设施建设。但增加公共开支的效果并不会马上显现。出于对地方政府难以实现宏伟目标的担忧，政府已经放缓了保障房建设的步伐。放松房地产调控可能为提振中国经济带来立竿见影的效果，但这将是一个令政府尴尬的政策转向。包括温家宝在内的高层领导人一直把刺破房地产泡沫作为政策日程的重点。房价目前为止仅较高点有很小幅的回落，让公众买得起房的问题并未得到解决。
经过三年的高投资后，基础设施项目中唾手可得的“果实”都已经被摘走了。为新项目选择融资需要时间，而且可能不会很快对经济产生刺激效果。渣打银行(Standard Chartered)中国经济学家王志浩(Stephen Green)说，他们不会慌乱，但会寻找各种方法。
彼得森国际经济研究所(Peterson Institute for International Economics)的中国专家拉迪(Nicholas Lardy)称，应当提高利率，至少是提高存款利率，这样可以增加普通消费者的收入。他说，经过一段时间后，更高的利率可能会降低家庭储蓄率，进一步促进国内消费。但很少有政府愿意在经济不断放缓之际加息。