World Economy

China May Need Policy Support

China May Need Policy SupportChina May Need Policy Support

A slew of official data points to the stabilizing Chinese economy, and slower growth could prompt additional policy support, said a report released by Swiss bank UBS.

Most headline numbers for the Chinese economy released during the past week were in line with expectations. While fixed-asset investment disappointed, imports surprised on the upside, and firmer domestic demand saw industrial output growth stabilize, according to the report, Xinhua reported.

On the downside, manufacturing and private investment weakened further in May, UBS noted, adding that pro-growth policies may intensify again once growth further slows.

The bank expects the still strong property sector and the unfolding effects of earlier or ongoing easing measures to help strengthen sequential gross domestic product momentum in the second quarter.

“We expect growth in the second quarter to be firmer than the first on a sequential basis, but not much improved on a year-on-year basis, and to lose steam later in the year,” the report said.

The bank saw macro policies “staying on hold” until the fourth quarter, when slower growth may prompt additional support again, and maintain its full year GDP growth forecast of 6.6%.

 Growth Forecast Lowered

China International Capital Corp on Monday lowered the forecast for China’s real GDP growth in 2016 from 6.9% to 6.7%.

The downward adjustment was “largely driven by the softer-than-expected global demand recovery,” CICC said in a research note.

Consumption demand is expected to be largely stable, government investment may continue to register stronger growth than that of the private sector, and export demand may remain weak in the latter half of this year due to political uncertainties in Europe and the United States, the CICC said.

The company maintained its consumer inflation forecast at 1.9% for 2016, with the consumer price index trending down in the next few months before picking up moderately toward the end of the year.

  Fiscal Policy

Meanwhile, the country’s fiscal policy is expected to loosen further after the ministry of finance stepped up efforts in fiscal loosening and lowered the tax burden of the corporate sector, according to the note.

The ministry has moved to promote the more efficient use of fiscal deposits, step up local government bond swaps and bond issuance, and also lower the effective tax burden of companies via value-added tax reform and lower social security contributions.

The country’s GDP grew 6.7% year on year in the first quarter of this year, down from 6.8% in the final quarter of 2015.

 Global Slow Down

Since the 2008 financial bust, all of the nations of Asia have been adjusting to a sharp drop in trade and economic activity with the western market economies. The subsequent drop in demand and prices for oil, gas and other commodities was also a reaction to the global economic slowdown, a troubling trend that has caused central banks around the world to embrace negative interest rates with all of the attendant risks and costs. The slowdown in economic activity around the world may also be behind the rise of populism in many nations.

Now, eight years since the 2008 financial crisis, many developed nations have continued to accumulate piles of new public and private debt. Among them, China is arguably one of the most vulnerable to the accumulation of debt, albeit in the context of a command economy, where funds flows represent political priorities rather than commercial factors.

Overall, China’s total debt was 168.48 trillion yuan ($25.6 trillion) at the end of last year, equivalent to 249% of GDP, according to Li Yang, a senior researcher with the China Academy of Social Sciences. Borrowers ranging from local governments to private enterprises could ultimately default, Li said, creating the possibility for a systemic problem for China’s state-controlled banks.

The biggest factor behind mounting worries regarding China’s debt is the slowdown in economic growth, which is now at the lowest level in twenty-five years.