The latest signs of weakness in China’s economy have raised the risk of Beijing missing its growth target for 2012 – something that has not happened in 14 years. This, however, could push policymakers - so far reluctant to come up with a 2008-style bumper stimulus package - to do more to bolster the flagging economy, say analysts.
China has not missed its annual growth target since the depths of the Asian Financial Crisis in 1998. In fact since 2004, China has had a growth target of 7-8 percent, but the average real growth rate has been around 10 percent.
Missing this year’s goal of 7.5 percent growth, which was seen as conservativewhen it was announced back in March, would certainly make bad timing as China’s leadership prepares for a once-in-a-decade transition.
In the absence of further monetary and fiscal stimulus, there is a possibility of that happening, say economists, given the recent bleak data.
Chinese exports grew a weaker-than-expected 2.7 percent in August from a year earlier and imports unexpectedly fell, data on Monday showed. That follows news on Sunday that industrial output grew a weaker-than-expected 8.9 percent in August, its slowest annual pace in more than three years.
Even if China were to grow this year at the targeted 7.5 percent, it would be its weakest growth in 13 years.
“It is possible they (China’s policymakers) could miss the forecast. They are aware that they could miss the target, so we should expect more stimulus measures coming through now,” said Alistair Chan, China Economist at Moody’s Analytics in Sydney, who expects China’s economy to notch up growth in the range of 7.5-8 percent for 2012.
The Chinese economy grew 7.6 percent in the second quarter – the sixth straight month of decline and the slowest pace in 3-1/2 years. Over the first half of the year growth has been 7.8 percent.
There has been concern in financial markets that Beijing has been slow to respond to the deteriorating economic outlook. The hesitation, analysts say, stems partly from a keenness to wait until the change in political leadership is over and a fear of repeating the mistakes of 2008-2009, when massive fiscal stimulus led to inflation and over investment in the property sector.
But there are signs that policymakers are stepping up their efforts as the economy slows more than they had anticipated. Chinese regulators last week approved $157 billion worth of investment projects, including 30 infrastructure projects. That news lifted China’s beleaguered stock marketon Friday.
“I think they are still on track for a full-year average of 7.5 percent growth. It’s just that according to the current policy environment, this is going to be a bit of a struggle,” Kelvin Lau, Senior Economist, Global Research at Standard Chartered in Hong Kong, told CNBC Asia’s “Squawk Box” on Monday.
“That doesn’t mean they will sit on their hands, China still has the room for policy easing. There is still room for more triple-R (banks’ reserve requirement ratio) cuts and one or two interest rate cuts,” said Lau. “So, I think that in itself will create a floor to shift growth upwards.”
Time to get Aggressive?
China has eased monetary policy by lowering reserve requirement ratios for banks three times since last November. It cut interest rates in June and July.
“If you look at Sunday’s data, it’s much weaker than the government expected and the government realizes this. They might get more aggressive on the infrastructure spending side, just to put a floor under the economy especially ahead of the more quiet months for the economy over the winter and Chinese New Year,” Francis Cheung, Head of China Strategy at CLSA in Hong Kong, said.
The Chinese New Year falls in early February next year and economic activity in the run up to the major holiday period tends to slowdown.
“China data since the June quarter have been soft and our revisions have been steadily going lower and we expect 7.5 percent for the calendar 2012, as Beijing would like,” George Boubouras, Head of Investment Strategy at UBS Wealth Management, told CNBC Asia’s “The Call.” “We think we are over the worst, the language out of Beijing is quite strong. Beijing is saying it will do whatever it takes and that is important, although we won’t get the same level of stimulus as 2008-09,” he added.
- By CNBC's Dhara Ranasinghe