HONG KONG - The prospect of China loosening its monetary policy helped to drive up Asia's markets on Monday as the country's leaders gathered for their annual Central Economic Work Conference, which will set the tone for next year's economic policy.
Shares in Japan and Hong Kong rose around 1.5% in early trading amid on the prospect that interest rates might soon be cut to encourage a pick-up in growth amid an increasing number of indications that the economy is slowing. They later trimmed gains. Within mainland China, the Shanghai Composite Index declined about 0.5% in early trade as the business outlook remained weak.
A statement after a meeting of the Communist Party Politburo last week before the work conference started today said the party would shift its top priority next year to promoting the economy and adjusting the economic structure, from this year's goal of combating inflation. Even so, they vowed not to relax measures to control property prices.
China's trade surplus shrank 35% last month, according to data released at the weekend, the yuan is weakening as capital leaves the country, and China’s Purchasing Managers’ Index (PMI) in November fell 1.4 points to 49, the first decline in 33 months. A reading below 50 signals contraction.
Meanwhile, consumer price inflation last month fell to 4.2%, its slowest pace in 14 months, from 5.5% year-on-year in October. The producer price index dropped to 2.7%, the smallest gain in almost two years, from 5.0%.
"The decline [in inflation] will give authorities more room to loosen policy and to support growth," Liao Qun, chief economist at Citic Bank International (CBI), told Asia Times Online.
The annual economic work conference, usually held in early December, may take longer this year to fine-tune its decisions on fiscal and monetary policy for the coming year due to the uncertain domestic and global economic outlook, he said.
"The European and the United States debt issues have been dominating international headlines, implicating a faltering world economy. In addition, if debt-ridden Europe, China's biggest trade partner and one of the major investors in China, cannot properly handle its debt issue, it could have a negative impact on China, so Beijing is waiting to see what the European Union summit in Brussels can deliver," he said.
Weakened demand from Europe has already helped to slow growth in China's exports, which rose 15.9% to US$157.49 billion in October from the same period in 2010 - the lowest growth rate in five months. Sales growth to the EU slowed to 7.5% in October, compared with 9.8% in September, according to the General Administration of Customs.
The People's Bank of China, China’s central bank, has already taken one step in loosening the economic purse-strings, on November 30 lowering the bank reserve requirement ratio (RRR) for the first time in almost three years. The 50 basis points cut took the ratio to 21% for large lenders and 17.5% for small and medium-sized lenders, unlocking about 400 billion yuan (US$63 billion) in deposits into the banking system that can now be used to create loans.
That may filter down the banking system sufficiently to ease borrowing for thousands of small and medium-sized enterprises (SMEs) largely shut out of the main lending system and dependent on borrowing from unofficial sources, or underground banks.
As many as 72,000 SMEs in Wenzhou, an important manufacturing center in eastern Zhejiang province which churns out thousands of low-value items (think cigarette lighters) that stock the world's shelves, have closed this year, according to Xinhua News Agency. In southern Guangdong province, hundreds of factories have closed due to reduced export orders.
China, which started a multi-billion dollar stimulus program in December 2008 to offset the impact of the global financial crisis, has since raised the reserve ratio 12 consecutive times to curb rising inflation loan growth. It hasn't raised interest rates since July, the longest pause since increases began in October last year. Of prime concern was a surge in property prices. These have started to decline in leading urban centers such as Beijing and Shanghai, but continue to gain in second- and third-tier cities.
Liao said the central bank may reduce reserve requirements "three or four more times next year".
"If the economy is not growing as policymakers expect in the second quarter, I believe policymakers will also decrease interest rates," he said, adding that next year might see two interest rate cuts.
As the economy growth rate slows, the yuan has reversed its previous appreciation, declining against the US dollar in recent days, giving ammunition to US critics demanding that an already weak yuan gives China an unfair trading advantage. Lu Zhengwei, chief economist at Industrial Bank, said the recent depreciation will further complicate decision-making for China's leaders seeking to set a direction for the coming year.
By last Thursday, the yuan had touched the low end of its permitted daily trading range for seven consecutive sessions, the longest weakening run in three years, as capital flowed out of the country. The central bank has set the middle trading price of the yuan at a persistently high level to prevent the currency from falling too sharply.
Li Yang, deputy head of the Chinese Academy of Social Sciences and a former adviser to the central bank, said last week that there will be less pressure on the currency to appreciate as the growth of foreign reserves has slowed.
"It is a chance for China to facilitate the internationalization of the yuan and promote the free float of interest rates, considering the current decrease in foreign exchange reserves and the depreciation of the yuan," he said.
China has foreign-exchange reserves totaling more than US$3 trillion. They have declined continually since the end of September and now "are basically falling every day", Bloomberg Business Week reported on December 7, citing a transcript of comments by Li at a forum and published on the china.com.cn website. Li didn't say how he knew that foreign reserves were falling or give a reason for the declines, the report said.
The reserves increased the least in more than a decade last quarter and declined in September for the first time in 16 months, according to the central bank, which releases the data on a quarterly basis.
The Asian Development Bank last week said China’s economic growth could slow next year to 8.8% from 9.1%, and possibly to as low as 6.8%. Asianomics.com founder Jim Walker and others have said growth could slow to as low as 5% or less. Below around 7%, the economy would be growing at too slow a rate to absorb the number of young people wanting to join the workforce.
"The Chinese are going to get down to a 4% growth rate in panic," David Roche, president of Independent Strategy and a former Morgan Stanley global strategist, said in an interview on Bloomberg Television last week....