China economists eye lower inflation, modest recovery

CAUTIOUSLY OPTIMISTIC: Buildings under construction amid fog in Rizhao, Shandong province. China's property market is "starting to stabilise", say PBOC economists.


    Jun 11, 2015

    China economists eye lower inflation, modest recovery


    ECONOMISTS at China's central bank have sharply lowered their inflation forecast for this year while predicting a pick-up in the world's second-biggest economy during the next six months, thanks to more stable home prices and firmer foreign demand.

    In a report posted on the website of the People's Bank of China (PBOC), the economists forecast annual inflation of just 1.4 per cent this year, down from their estimate of 2.2 per cent.

    The report said that the estimates represented the view of the economists, and not that of PBOC. The economists were cautiously optimistic, despite downward revisions to other forecasts that reflected the headwinds faced by the stuttering economy.

    China's sagging property market is "starting to stabilise" and the world economy should show further signs of recovery in the coming months, said the economists led by Ma Jun, the central bank's chief economist.

    Looser monetary policy conditions, as a result of China cutting interest rates three times since November, were also expected to help shore up growth in the coming months, the economists said.

    "We have reason to expect some modest recovery in sequential growth in the second half of this year," they said.

    The economists noted that it takes six to nine months for China's economy to feel the benefits of monetary policy easing.

    The report showed that the economists had shaved their forecast for China's economic growth to 7 per cent for this year, from 7.1 per cent previously.

    Dragged by a cooling housing market, anaemic domestic and foreign demand and stuttering local investment, China's economy grew at its weakest pace in six years in the first quarter, expanding 7 per cent.

    There are few signs that the downturn is abating: China's imports shrank more sharply than expected last month, data showed earlier this week, strengthening investor bets that Beijing must further relax policy.

    Worries over deflationary pressures were reflected in a sharp downward revision to the economists' forecasts for producer prices, with the index now expected to fall 4.2 per cent, marking a far sharper drop than the 0.4 per cent decline foreseen earlier.

    Kevin Lai, an economist at Daiwa in Hong Kong, reckoned the central bank economists were being too optimistic with their forecast for a recovery in growth during the next six months.

    "We are not sure why the PBOC economists think it will get better," he said. "We think the second half (of the year) will be more difficult. Deflationary pressure will be stronger."

    Falling producer prices and slowing consumer inflation will lift borrowing costs in real terms, further squeezing companies already buffeted by weak orders, Mr Lai said.

    He also doubted whether any turnaround in the housing market would be strong enough to offset weakness elsewhere.

    The PBOC economists acknowledged China's sluggish domestic demand, saying the housing slump and falling global commodity prices had limited spending.

    But they predicted that China's housing market could soon turn the corner, spurring new investment in the next six to nine months.

    The report said housing investment has cooled twice as fast as previously forecast, and was down 10 percentage points in the first four months of this year, compared with a year earlier.

    "The recent measures introduced to stabilise (economic) growth will show their effects in the next few months," they said.