China's Slowed Growth Puts Focus on Stimulus - Wall Street Journal

By TOM ORLIK

BEIJINGâ€"New evidence of continued deceleration in China's economic growth has raised concerns among some economists that the government's stimulus efforts may be too limited and too slow to prevent a further slump in the world's second largest economy.

The latest gloomy data arrived Friday, with key business-sentiment surveys pointing to deteriorating conditions in the manufacturing sector. China's official purchasing managers' index fell to 50.4 in May from 53.3 in Aprilâ€"close to the 50 mark that separates growth from contraction. Meanwhile, the HSBC Markit PMI, which slipped to 48.4 from 49.3, pointed to worsening conditions for small private firms and exporters.

The Australian dollar fell to its lowest level against the U.S. dollar since October 2011 as investors feared commodity exports would suffer from weak Chinese demand. Stock markets were mixed. In Hong Kong, the Hang Seng China Enterprises Index ended the day down 0.7%. The Shanghai Composite Index eked out a 0.5% gain.

Wang Qinwei, a China analyst at Capital Economics, said weak growth reflects tardiness by the government in shifting policy into stimulus mode from its earlier emphasis on containing inflation. "The policy easing was too slow and too little, but from the end of May we have seen a more decisive move to stimulate the economy, and that should start to have an impact," he said.

In a speech on May 20, Premier Wen Jiabao put growth at the top of the government's policy priorities. Analysts recently have pointed to accelerated approval of investment projects, moves making it easier for banks to lend, and subsidies for consumers to buy electronic products as evidence that the pro-growth shift already is under way.

China also has other policy options. Li Wei, a China economist at Standard Chartered, said Beijing could amp up public spending or take further steps to encourage bank lending.

"It's likely Beijing will start to front-load public spending, running a budget deficit in the months ahead," he said. "We also expect to see an accelerated pace of new lending, especially medium- and long-term loans that go to investment projects."

China has targeted a fiscal deficit of 1.5% of gross domestic product for 2012, but the overall position in the first four months of the year has been a surplus.

Easing up on controls on the property sector would also be an option to support growth. Real-estate prices continued to edge down in May, falling 1.5% year-to-year, according to a widely watched data series covering 100 Chinese cities from data provider China Real Estate Index System. Falling prices and weak sales dent incentives for developers to break ground on new projects, taking a chunk out of China's growth.

Nicole Wong, China property analyst at CLSA, said there was no evidence so far of a significant shift in the government's two-year controls on the real-estate sector.

"They are making some baby steps; there are some cheaper mortgages in first-tier cities, but in the second- and the third-tier cities, mortgage costs are still high," she said. "Until that changes, sales won't rise significantly."

Analysts cautioned that shifts to support growth would have costs. The loan binge that saw China through the financial crisis left the economy grappling with higher inflation, the risk of bad debts in the banks and surging property prices. Opening the floodgates a second time could worsen those problems.

As important, some areas of weakness remained outside the control of Beijing. Zhu Haibin, China economist at J.P. Morgan, reduced his 2012 GDP forecast for the Chinese economy to 7.7% from 8%. "The main reason is the rising uncertainty in the euro area" he said.

â€"Esther Fung in Shanghai contributed to this article.

Write to Tom Orlik at Thomas.orlik@wsj.com