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Why China Will Not Bow to Pressure to Boost Economy

The latest batch of weak economic data from China is piling pressure on Beijing to act fast to shore up an economy that is slowing faster than expected, but experts say there are plenty of reasons why any stimulus might not come soon.

Guy Vanderelst | Photographer's Choice RF | Getty Images

For one thing, China’s economy, while slowing, is still growing at a reasonable ratebetween seven and eight percent annually and that means China does not need to rush to provide the economy with a large monetary or fiscal boost that some are hoping for, analysts tell CNBC.

There is also that not-so-small matter of a transition to anew political leadershipbefore the end of the year, which means Chinese policymakers are keen to tread carefully with regards to economic policy.

“China is still growing around 7-8 percent, so the last thing it needs is a very big stimulus package, especially on the fiscal stimulus side,” Eddie Tan, Chief Investment Officer at Central Asset Investments told CNBC Asia’s “Cash Flow” on Monday. “On the monetary side, there is more room to ease and maybe because of politics it has been delayed a bit.”

A survey on Monday showed the HSBC Purchasing Managers’ Index (PMI) fell to 47.6 in August, its lowest level since March 2009 as a contraction in Chinese manufacturing activity deepened. The data followed the release of China’s official PMI on Saturday which fell to 49.2 in August from 50.1 in July - falling below the 50-mark that divides expansion from contraction for the first time in nine months.

The data, rather than denting investor sentiment, boosted equity markets in China and Hong Kong as investors bet that China would have to take action soon to support its economy.

“If you were a stock market investor you would probably say it’s too late,” Tan said, talking about whether China is falling behind the curve with its policy response to an economy that has slowed for six straight quarters.

“But the Chinese look at things differently, they may not see that a quick fix for the markets is the right move long-term. A quick fix via a stimulus package or even a quick relaxation in rates may not be the right solution for China,” Tan added.

Despite a slew of weak economic numbers, China’s policymakers are also mindful of not repeating the mistakes of four years ago. In 2008-2009, the government announced spending worth $586 billion or 14 percent of its GDP, to bolster China’s economy in the face of a global financial crisis, but that spending has subsequently been blamed for problems such as inflation and over capacity.

China has however eased interest rates twice already this year to lift growth and eased monetary policy by slashing reserve requirement ratios for banks three times since last November.

“China is between a rock and a hard place. They need policy measures but at the same time the macro situation is not that dire to call for major stimulus measures,” Taimur Baig, Chief Economist, Global Markets Research at Deutsche Bank told CNBC Asia’s “Squawk Box.”

“And of course there’s distaste for big stimulus measures given the aftermath of the 2008-09 crisis. So, our view is that for the rest of the year we are only likely to get mild stimulus measures,” he added.

Don’t Forget Politics

A once-a-decade transition in China’s leadership, expected to take place in October, is another reason why markets should not expect imminent stimulus moves from Beijing, analysts said.

“They (Chinese officials) have all these levers to pull, but they are a bit caught. Do they start making decisions that would then have to be handed over to a new leadership that comes in later this year or do they sit tight?,” said Martin Lakos, Director at Macquarie Private Wealth.

“Basically they are saying we have to let the economy hold at this stage and let the new administration come in and allow them to set new policies. It is a bit of a conundrum there’s no doubt about that,” he added.

Other analysts felt China’s economic conditions did warrant a more aggressive monetary policy response from the Chinese central bank.

“It fascinates me that there are lots of economists not looking for China to ease further. They are going to ease and they are probably going to ease over successive months,” Thomas Murphy, Managing Partner at Family Office Research and Management, an independent investment advisory group based in Sydney, told CNBC.

“We expect rate moves this year because the inflation numbers give them that opportunity and the PMI data is low,” he added. Data released last month showed China’s annual consumer inflation eased to a 30-month lowin July of 1.8 percent.

- By CNBC's Dhara Ranasinghe

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