A deaf ear to China's dangerous dip

As China tilts toward a sharp economic slowdown, analysts are calling for a rapid easing of monetary policy – but Beijing's policymakers don't appear to be listening.

Chinese shares are plumbing their lowest levels since March 2009, as investors fret that the country’s central bank is failing to act aggressively enough to boost faltering economic activity.

The Shanghai Composite index dropped 1.1 per cent to 2,166 points yesterday, as investors responded to tight liquidity conditions by selling off property companies, industrial groups and banks. Since the beginning of the year, the index has fallen 23 per cent.

China’s central bank, the People’s Bank of China, took its first move towards easing monetary policy in late November, when it cut the level of deposits that the banks must hold in reserve – the first cut in three years.

But with Chinese economic activity showing signs of an abrupt slowdown, many analysts argue that the central bank needs to be much more aggressive in easing monetary policy if the country is to avoid a sharp fall in economic activity.

They argue that the Chinese economy is particularly vulnerable to a slowdown in the developed economies because of its heavy dependence on export earnings. Already, the raging sovereign debt crisis is pushing Europe (which is China’s largest overseas market for toys, textiles, machinery and electronics) closer to recession and this is crimping demand for Chinese exports. In October, European orders for Chinese goods fell by 22 per cent compared with the previous month.

This drop-off in export orders is already evident in slowing Chinese manufacturing activity. At the beginning of December, Beijing announced that its manufacturing sector (which makes up about 50 per cent of GDP) had contracted for the first time since 2009.

At the same time, many analysts argue that conditions in the domestic Chinese economy justify cuts in interest rates, and further reductions in the level of deposits that banks are forced to hold as reserves.

Chinese inflation, which hit a peak of 6.5 per cent in July, is easing as a result of falling commodity prices and the central bank’s earlier moves to tighten monetary policy. Over the past 12 months, the Chinese central bank raised benchmark rates four times, and lifted reserve requirements seven times in order to stifle inflation.

What’s more, China’s property market – which has long been an engine of the country’s economic growth – has also cooled, as a result of tighter monetary conditions, and Beijing’s efforts to combat rising property prices by pushing up deposit requirements, and introducing restrictions on people buying their second and third homes. Some analysts believe that Chinese housing starts could fall by up to 15 per cent next year, which will likely create ripple effects in the steel and other construction-related industries.

At the same time declining real estate prices have sparked fears that local governments – which are heavily dependent on revenue from selling land – could result in financial problems for local governments. As a result, some may have to cut back on their infrastructure spending, further dampening growth, while others may struggle to meet their loan repayments, which could push up the number of problem loans in the banking system.

But calls for a rapid easing in monetary policy appear to be falling on deaf ears in Beijing. At the government’s annual economic conference held a fortnight ago, policymakers stuck to their previous rhetoric, calling for a continuation of "prudent monetary policy”.

Meanwhile, tensions in China’s property market will continue while Beijing persists in its efforts to lower housing prices, which it believes is important for maintaining social stability. According to a statement released after the conference, the Chinese government next year will "unswervingly adhere to real estate control policies”.

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