world growth

world growth

Tuesday, July 3, 2012

China economy will grow 7.5% in 2012

 China's cooling economy should stabilize in the third quarter and the government is confident it can meet its growth target of 7.5 percent for the year, the chief researcher at the finance ministry said on Thursday.

Beijing is "cautiously optimistic" about China's economic prospects because it has scope to loosen monetary and fiscal policies to shore up activity, said Jia Kang, director of the Research Institute for Fiscal Science at the Ministry of Finance.

"Looking at the second half of the year, we are still confident we can meet the growth target of 7.5 percent," Jia said at a financial forum in Shanghai. "We should see stabilization (in economic activity) in the third quarter."

Analysts believe economic expansion of under 7.5 percent in China is risky as it flirts too closely with a 7 percent growth threshold seen to be the minimum needed to create enough jobs.

Concern has been growing that slowing exports, factory production and investment would lead China to miss its 2012 growth target, a level many had thought Beijing would comfortably beat when it was announced in March.

After growth sank to near three-year lows of 8.1 percent in the first quarter, China surprised many in the market by cutting interest rates by 25 basis points earlier this month.

It has also lowered banks' reserve requirements twice this year by a total of 100 basis points to 20 percent, a level analysts say is still too high and which they expect to be reduced by another 100 basis points before the year end.


Indeed, an executive director at the Bank of Communications , China's fifth-largest bank by assets, said it would be "very risky" if China's economic growth slips under 7.5 percent.

That would spark a broad downturn across all major business sectors, raise loan losses for banks, and amplify risks around China's local debt problems, Qian Wenhui said.

China has a 10.7 trillion yuan ($1.7 trillion) debt mountain incurred by local governments after the 2008/09 financial crisis, when they answered Beijing's call to spend their way to growth. Many see the debt overhang as a big threat to banks.

On that, Jia criticized the government's recent decision to tentatively retract support for local Chinese governments to sell municipal bonds directly to investors.

The turnabout is problematic because local Chinese governments were supposed to sell municipal bonds to raise much-needed cash to pay down debts.

The government's reversal in stance was revealed when the top legislative body removed a legal provision that would have backed the change.

"If you scrap the provision just because you see real conflicts, that means you won't be bringing about any change," Jia said. "I do not understand such a course of action."

Without giving details, Jia said some in the government had opposed the change, but he still expects China to continue with its pilot test to allow local governments to sell bonds.

Economists have said any change China tries to bring to its financial system would be an arduous process as different groups would wrangle to protect their own interests.

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