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    China's Economy Slowing Further Despite Liquidity Injections

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    China’s economy has slowed further in October, as data by People’s Bank of China (PBOC) indicated as the limited stimulus action had no effect amid high volatility in the nation’s finance.

    MOSCOW, November 15 (Sputnik) – The economy of mainland China continued its slowdown in October, as commercial lending contracted, manufacturing growth decreased and the recent governmental attempts at bolstering activity through money injections have had no decisive effect, while experts call for monetary easing.

    Mainland China’s authorities have been struggling to redesign the nation’s economy to be based on a more sustainable domestic consumption model instead of the export-oriented growth model that provided for an extraordinarily fast pace of expansion during the last two decades. However, as October’s data has shown, the nation is still facing more trouble than success in their transit. The economy continues to cool as foreign demand on the Chinese-produced industrial goods is shrinking.

    "We do have problems that have been accumulating over time," China’s Vice Finance Minister Zhu Guangyao said during the G20 summit in Australia as quoted by Reuters.  

    According to Bloomberg estimates, China’s cumulative production amounts in October reached only 662.7 bn renminbi ($108 bn), down by 36% compared to September’s 1.05 tn renminbi ($170 bn).  This is also lower than Bloomberg experts’ earlier median estimate of 887.5 bn.

    The decline in commercial credit is attributed to the multiple reports concerning bad loans, which have been on the rise recently, having accelerated in summer. Furthermore, deposits in banks have decreased, severely restraining the banks’ lending ability. The local government debt has also contributed to pressure on the nation’s financial system.

    "The downward pressure on the economy will increase if we don't step up policy support," Wang Jun of the Beijing-based China Centre for International Economic Exchanges (CCIEE) told Reuters. In his opinion, the government should undertake several easing measures like lowering reserve requirements for commercial banks so that they could maintain volumes of lending with decreased financial resources.

    China’s authorities have been reluctant to implement monetary easing measures as they may further destabilize the looming asset bubble in the real estate sector. However, the People’s Bank of China has poured about 770 bn renminbi ($125.6 bn) into the nation’s economy by providing three-moths loans to several commercial banks in order to support lending. Surprisingly, this did not help, as the October data have shown.

    "The central bank seems to be more inclined to use innovative tools to release liquidity, but such tools have limited effectiveness," Niu Li of the State Information Centre said as quoted by Reuters. In his opinion, the government in Beijing has opportunities to implement some limited easing measures as inflation is low and credit is still expensive. However, some experts argue, cutting interest rate may spawn asset bubbles in some sectors.

    China’s manufacturing rose 7.7% in October year-on-year, while fixed-asset investment was at its lowest since 2001, Bloomberg data have shown.

    “I believe that targeted easing so far are not effective enough to support China’s slowing growth momentum,” Shen Jianguang of Mizuho Securities Asia Ltd. in Hong Kong told Bloomberg. In his words, interest rate cuts are possible as early as this December. Others say decisive easing will not come into effect before 2015, as Peaople’s Bank of China (PBOC) is still more interested in addressing credit risks than stimulating financial sector, which in the current volatile situation may be dangerous.

    Larger stimulus seems unlikely anytime soon because the total amount of local government debt amounts to 4 tn renminbi ($650 bn), and accelerating commercial lending is only exacerbating this burden. As these debts are ultimately guaranteed by the central government in Beijing, the authorities are unlikely to undertake any action to complicate their own financial position. On the other hand, sluggish growth demands a decisive response. One way or another, China is in a trap of low growth, high volatility, bubble risks, and high local indebtedness, which have left it lowering the reserve requirements ratio (RRR) the only possible tool of easing in the current circumstances. The RRR shift is likely to be undertaken as soon as this year, however, it is yet unclear whether it will prove efficient.

    Beijing's growth target for 2014 is 7.5%, but third quarter data has fallen short of the figure, reaching only 7.3%, while the current trends suggest little optimism for fourth quarter results.

     

    The views and opinions expressed in the article do not necessarily reflect those of Sputnik.

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