A Small Boost




DON’T COUNT on China for a growth bailout this time. That may be the unspoken message to world leaders from Premier Wen Jiabao as he takes steps to counter the slowdown in his country. While the Chinese government has approved the acceleration of more than 800 billion yuan ($126 billion) in projects and has cut interest rates, it’s narrowly targeting its spending on specific industries such as green energy. Wen isn’t letting loose the flood of money he did a few years ago.

The 4 trillion yuan stimulus China deployed to counter the 2008-to-2009 global recession, combined with a 17.6 trillion yuan surge in credit, inflated a property bubble and helped push retail inflation as high as 6.5 percent in the middle of last year. It also led to bad debts that Fitch Ratings says weakened the country’s banks. For those reasons, Wen can’t afford to take such aggressive measures again.

“The recent policy support is an effort to trim the downside risk and sustain overall growth at about 8 percent, not a major stimulus that would save the world economy as in 2009,” says Wang Tao, an economist at UBS AG in Hong Kong. Doing more could reignite inflation, overheat the property market or add to the bad debts with which the banks eventually must contend.

China’s gross domestic product grew 8.1 percent in the first quarter from a year earlier, the slowest rate since the second quarter of 2009. While 8 percent growth would seem like a dream in the U.S. or Europe right now, it’s slow enough to alarm China’s leaders. The economy expanded at an annual pace of 10.6 percent during the past decade, exceeding 9 percent even in 2008 and 2009, when the international financial system froze and the global economy shrank.

China has sped up approvals for wind farms, hydropower plants, airports and steel mills that are endorsed in its five-year plan through 2015. Fifty-five percent of this spending is for clean energy or to subsidize fuel-efficient vehicles, according to an analysis by Australia & New Zealand Banking Group Ltd. The government released 66 billion yuan in funding for low-cost housing and will allocate 26.5 billion yuan to support purchases of ecofriendly large appliances.

Policy makers have encouraged banks to lend by lowering reserve requirements by 1.5 percentage points in three cuts since November, to 20 percent for the biggest institutions. The government has also expanded loans for first-home buyers — aiming to support property values without fueling the speculation that drove up housing prices in 2009 and 2010. China’s central bank cut one-year lending rates on June 7 for the first time since 2008, by a quarter point.

“The rate cut is an indication of greater policy engagement but not a harbinger of an all-in policy response,” says Ramin Toloui, Pacific Investment Management Co.’s co-head of emerging-markets portfolio management, who’s based in Singapore. Toloui expects growth in the mid–7 percent range for China in 2012.

For now, investors must be concerned about two scenarios: A worse slowdown in China is possible, especially if the euro zone’s sovereign-debt crisis worsens, crimping European demand for exports from Chinese factories. On the other hand, overheating might yet be a hazard if the leaders of the world’s second-largest economy pull too hard on the wrong levers.

“You can quite easily imagine a scenario where China approves a few too many projects and growth comes in at 9 percent,” says Alistair Thornton, an economist at IHS Global Insight in Beijing. “That would be fantastic in the short term,” he says. “But in the longer term, that raises the risk of asset bubbles, bad debt and inflation.”


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