China's capital spending slowed in November, rounding out a weak batch of monthly data that has pointed to an abrupt slowdown in the world's fourth-biggest economy — and a challenging policy task in the months ahead.
Spending in urban areas on fixed assets from apartments to factories rose 26.8 percent in the first 11 months of the year compared with the same period in 2007, down from 27.2 percent in the first 10 months and roughly in line with expectations.
The slowdown in spending was one of the more modest disappointments in a month that saw exports and imports contract for the first time in years and factory output grow at its slowest pace on record.
Economists and officials are now more concerned than ever that growth will fall well short of the 8 percent pace that Beijing considers necessary to create enough new jobs to absorb the millions of people entering the workforce each year, raising stirring worries about social stability.
Economic growth had already slowed to a 9 percent annual clip in the third quarter, before the impact of the financial crisis became fully apparent, compared with 11.9 percent in 2007.
"This is a challenge for China. Managing the down cycle is not something that your companies, your leaders, your policy makers have much experience doing," Stephen Roach, Asia chairman for Morgan Stanley, told a financial conference in Beijing on Monday.
MORE RATE CUTS?
Beijing has already started to take action.
The government last month unveiled a 4 trillion yuan ($586 billion) fiscal stimulus package; the central bank has sharply cut interest rates; and the cabinet recently announced plans to make financing more readily available to firms.
Zhou Xiaochuan, governor of the People's Bank of China (PBOC), said on Tuesday that the central bank will face pressure to cut interest rates further until the middle of 2009, although rate decisions will depend on the pace of consumer inflation.
"First we care about the cost of capital for enterprises and secondly the interest rate should be linked with CPI," Zhou told reporters in Hong Kong.
Consumer inflation fell to 2.4 percent in November, which many economists said gives the PBOC further scope to cut rates.
But despite policy action, the outlook appears to be darkening, prompting some economists to further cut their growth forecasts.
Factory output expanded just 5.4 percent in the year to November, the worst figure on record. Exports dropped 2.2 percent from a year earlier, while imports fell 17.9 percent.
The head of the International Monetary Fund, Dominique Strauss-Kahn, went so far as to estimate that China's economic growth could slump to around 5 percent next year. [ID:nLF40653]
"We are facing an unprecedented decline in output and we have evidence of substantial uncertainty limiting the effectiveness of some fiscal policy measures," he said in Madrid on Monday.
QUANTITATIVE EASING
The key for Beijing will be to maintain the necessary policy flexibility to deal with new challenges as they crop up, World Bank President Robert Zoellick said during a visit to China.
"Whether it be China or the globe, I think everyone recognises that the first six months of 2009 are going to be very difficult," Zoellick told a news conference in Beijing on Monday.
Perhaps more important than rate cuts will be the government's efforts to stimulate lending, formulated in the State Council's recent directive on easing monetary conditions, in which it targeted 17 percent money supply growth in 2009. [ID:nSP361299]
"Combined with the announced massive fiscal boost, this aggressive quantitative easing in credit, once it feeds in, is likely to lift the GDP growth to well over 8 percent in the second half of 2009, though we should prepare ourselves for more bad news on growth in the coming quarters," Qu Hongbin with HSBC in Hong Kong said in a report.
Even with exports expected to decline in 2009, further fiscal stimulus could enable economic growth to reach 8 percent for all of next year, Tomo Kinoshita and Mingchun Sun with Nomura in Hong Kong said in a research note.
"The biggest risk, in our opinion, lies in external demand given China's high dependency on exports," they wrote.
Longer term, policymakers need to do more to carry out the rebalancing of the economy that they have been talking about for years, Morgan Stanley's Roach said.
"Quite frankly, I am not particularly thrilled with the policy recipes (so far)," he said.
"China needs to shift its growth dynamic away from investment and exports, increasing … consumption. It needs to increase it by building out its safety net."
