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- Maintaining economic growth will be the top priority in 2012, followed by price stability, according to the annual Central Economic Work Conference concluded on 12-14 December. During the meeting, the authorities pledged to uphold last year’s “proactive fiscal and prudent monetary policy” in 2012.
- The Mainland’s economy showed clearer signs of moderating in recent months on persistent monetary tightening and worsening external demand. Inflationary pressure also continued to ease after peaking in July.
- Looking into 2012, the trend of moderating growth is expected to persist on lingering sovereign debt problems in Europe and the fragility of the US economic recovery. Mainland China’s economic growth is forecast to ease to 8.6% for the year as a whole from an estimated 9.3% in 2011. However, inflation is likely to fall steadily to about 3.5% in 2012 on the back of downward pressure on home prices and slower growth in food prices.
- With growth slowing and inflation trending lower, the central authorities are likely to ease policies further. We expect the People’s Bank of China (PBOC) to cut banks’ required reserve ratios (RRR) five more times in 2012, each time by 50 basis points. We also expect the PBOC to cut interest rates asymmetrically in a bid to ease the negative interest rate and help interest rate liberalisation. Interest rates could be cut three times, each time by 25 basis points for loans and 10 to 15 basis points for deposits, which would narrow the spread of loan and deposit rates. By the end of 2012, the one-year loan rate would be 5.81% and the RRR for large banks would be 18.5%. The pace of RMB appreciation is also expected to slow in order to support export growth, with the RMB rising to only 6.15 per US dollar by the end of 2012 from 6.30 at the end of 2011.
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The annual Central Economic Work Conference, held on 12-14 December, set the main theme for economic and social development in 2012 to be “making progress while maintaining stability”. The meeting concluded with policymakers pledging to maintain last year’s “proactive fiscal and prudent monetary policy” in 2012. However, they put “maintaining economic growth” ahead of “keeping price stability” when listing the economic objectives for 2012, indicating that economic growth was put in a more prominent position. Thus, with softening inflation and deteriorating global economic conditions, the top priority of the Mainland authorities will shift to maintaining economic growth in 2012 from curbing inflation in 2011.
The meeting also listed other major tasks for 2012, including:
1. replacing the business tax with value-added tax,
2. stimulating domestic demand,
3. safeguarding and improving social welfare,
4. accelerating rural development,
5. construction of public housing and maintaining a tight policy for the housing market, and;
6. deepening interest rate and exchange rate reforms.
On the external front, policymakers also pledged to adopt policies to stabilise exports and boost imports, as well as keeping the RMB exchange rate basically stable.
Slowing growth momentum and easing inflation pressure
The shift in policy focus is understandable as the Mainland economy has been showing clearer signs of moderating in recent months, as a result of persistent monetary tightening and worsening external demand.
Though retail sales maintained steady growth of around 17% in both October and November, growth in fixed asset investment (FAI) in urban areas eased more visibly, to 21.2% in November from 24.9% in the previous month.
Externally, export growth also slowed to 13.8% in November from 15.9% in October, while import growth decelerated at an even faster pace, to 22.1% from 28.7% during the same period. Due to faster increase in imports than exports, the trade surplus narrowed to US$14.5 billion in November from US$17.0 billion in October.
Consumer price inflation continued to trend lower, to 4.2% in November from 5.5% in October due to slower growth in both food and non-food prices. In November, food prices rose 8.8% after increasing 11.9% in October, while non-food prices grew 2.2% after advancing 2.7% during the same period.
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