Another month or two of slack data may prompt change, experts believe

When Premier Li Keqiang spoke at the World Economic Forum in Tianjin last Wednesday, he probably already had economic data for August, which had not yet been released, in mind. He said the government would not be distracted by short-term fluctuations in individual economic indicators and would maintain its focus on structural adjustments and dealing with long-term issues.

Three days later, figures from the National Bureau of Statistics took the market by surprise. Industrial output rose 6.9 percent year-on-year in August, the slowest pace since 2008 amid the global financial crisis and a sharp drop from 9 percent in July.

Fixed-assets investment, an important driver of economic activity, slowed to a 14-year low of 16.5 percent in the first eight months of the year. In particular, electricity output - a closely watched economic indicator - dropped 2.2 percent.

The message from the August data dovetailed with previous figures that showed the second straight decline in imports and a 40 percent drop in the broadest measure of new credit, which reflected weak domestic demand.

"Growth slightly higher or lower than the 2014 target of 7.5 percent is acceptable as long as employment, incomes and environmental protection improve," Li said in Tianjin.

Trey McArver, a London-based consultant specializing in Chinese business, said: "The new emphasis could signal an attempt by (Li) to move the focus of economic policy away from headline growth targets. To maintain growth at the current 'around 7.5 percent' target will necessitate continued inefficient investment that will exacerbate the current imbalances."

Ma Xiaoping, an economist with HSBC Holdings Plc, said: "I think (Li) is trying to send a message that things are still OK, to say if there's a further slowdown in the economy, they do have a higher tolerance for a lower growth rate."

But he added: "If the slowdown continues for another one or two months, I think they will not stay there. They may opt for a broader cut in the banks' reserve requirement ratio or in interest rates. They can keep calm for another month."

Ma was not alone in advocating a cut in benchmark interest rates or the overall reserve ratio. A number of financial institutions, including UBS AG, Mizuho Securities Co Ltd, Nomura Securities Co Ltd, The Australia and New Zealand Banking Group Ltd, have called for or forecast cuts in interest rates or reserve requirements.

"They have to introduce more stimulus. Otherwise, how can they even maintain 7.3 percent growth?" asked Shen Jianguang, chief economist with Mizuho.

Wang Tao, chief economist with UBS China, said: "A cut in the benchmark lending rate is the most direct and effective way to lower financing costs in the economy as nearly 70 percent of credit is priced off of the benchmark. That said, we think a cut in mortgage lending rates may more likely come first."

Analysts with ANZ warned that growth in GDP may slip to 6.5 to 7 percent in the third quarter if September numbers are also weak.

However, analysts with a government background were less concerned, arguing that the market should not read too much into a single month's data. In addition, the annual target for job creation has nearly been reached, suggesting there is still room for tolerance.

Chen Yulu, a member of the People's Bank of China's monetary policy committee, was quoted by Chinese media as saying: "It is not time for an interest rate cut. That's a strong signal, and we should refrain from using it as much as possible. The central bank has an ample number of tools to use, such as targeted easing and open market operations."

Cao Yuanzheng, chief economist with Bank of China Ltd, argued that an interest or reserve ratio cut will not help much, as the problem is weak growth momentum, severe overcapacity and slack loan demand.

"A single month's data are too little on which to draw conclusions. The growth rate has apparently slid by a floor. The problem is whether the economy can stand firm at the lower floor," Cao said.

A commentary in a newspaper affiliated with the official Xinhua News Agency went further, with a criticism of foreign institutions' push for stimulus despite Li's statements: "The reliance on government 'paternalism' is ingrained in many people's souls ... They ignore the fact that the economy has entered a 'new normal'."

sound bites

"It is not time for an interest rate cut. That's a strong signal, and we should refrain from using it as much as possible. The central bank has an ample number of tools to use, such as targeted easing and open market operations."

Chen Yulu, member of the monetary policy committee, People's Bank of China

"It hink, for sure, more stimulus measures will be rolled out, with a bigger chance the government will take a more aggressive approach on interest rates. Before this data, I thought there was a 10 percent chance of a broad interest rate cut. But when you look at this terrible industrial production data in August, I see a 50 percent chance for a broad general interest rate cut. I think they need to do something a little more aggressive."

Larry Hu, economist, Macquarie Group Ltd

"Although a rate cut seems unlikely at the moment given the government's policy rhetoric, we believe a further slowdown in economic activity and growing deflationary pressure will make it a possibility in the next one or two quarters ... Given the third quarter's weaker-than-expected growth thus far, we revise down our GDP growth forecast for the third quarter from 7.3 percent to 7.1 percent and that for 2014 from 7.3 percent to 7.2 percent."

Wang Tao, economist, UBS AG

"We do not believe the government will use massive stimulus measures to support the economy, as employment conditions remain relatively healthy ... we believe the government will speed up structural reforms. More efforts will be given to financial reform (including the establishment of private banks and further improvements to the capital market), State-owned enterprise reform [including price reforms for energy, pharmaceuticals and healthcare and the removal of State monopolies], reform to change government functions and finally, fiscal reform, which would help lower companies' tax burdens."