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IMF: Soft landing 'possible'

Updated: 2012-07-26 09:03
By Chen Jia ( China Daily)

Growth rate of second-largest economy to moderate to around 8%

China's economy is on track to achieve a soft landing despite the worsening external outlook, depending on boosting investment in the short term, which is pushing the government to internally rebalance the growth model toward consumption, a report from the International Monetary Fund said.

The Washington-based international financial organization predicted that the growth rate of the world's second-largest economy may moderate to around 8 percent this year after six consecutive quarters of slowdown.

IMF: Soft landing 'possible'

Workers at a track-laying site on the Hami-Lop Nor Railway in the Xinjiang Uygur autonomous region. An IMF report said China can achieve a soft landing and manage to have economic growth of around 8 percent this year. [Photo/China Daily]

"In the event of a worsening of the external outlook, China has ample room to respond forcefully, using fiscal policy as the main line of defense," said the IMF report, although investment-dependent growth "cannot continue at the rapid pace forever".

Markus Rodlauer, head of the IMF's China team, highlighted how the cooling of China's investment can affect the global market.

"A very sharp slowdown in investment in China would have a fairly significant impact on growth and exports of goods from countries like Japan, Germany, Chile, and of course other countries in Asia."

The world doesn't want to see a sharply weakened economic engine while the European debt crisis is worsening, so "policies should continue to be geared toward achieving this year's growth targets", according to the report.

The government has taken measures to respond to the slowest economic expansion -7.6 percent in the April-to-June period - since the second quarter of 2009, by spending more and easing monetary policy.

The central bank has lowered the reserve requirement ratios twice this year to free more market liquidity and cut benchmark interest rates twice within a month to boost lending.

Many economists from global financial institutions believed that those measures have started to have an effect, which will help economic growth recover in the second half.

The Ministry of Industry and Information Technology said growth may stabilize and rebound in the rest of this year as policies gradually take effect.

"The deep impact of the global financial crisis is continuing to unfold", which is having a great effect on "many companies", said Zhu Hongren, a spokesman for the ministry.

The mainland's benchmark stock index - the Shanghai Composite Index - retreated 0.4 percent to 2,136.15 at the close on Wednesday, the lowest since March 2009, showing that investors remain skeptical about how strong the recovery will be.

The index, which tracks the biggest companies in China, has fallen 13 percent from this year's high point on March 2.

Lu Zhengwei, chief economist with Industrial Bank, predicted on Wednesday that the consumer price index for July may further slump to 1.7 percent from June's 2.2 percent, while the producer price index is likely to decrease 2.5 percent compared with a 2.1 percent drop in June, suggesting that the corporate environment may be worse.

As CPI is expected to slow to less than 2 percent in the third quarter, there will be more room for monetary policy easing, a research note from JPMorgan Chase & Co said on Tuesday. It expected one more interest rate cut and three RRR cuts in the second half.

Besides, further fiscal stimulus can strongly support growth through tax cuts and more infrastructure investment projects, the bank said.

The uncertain global economic environment and weak overseas demand have increased selling pressure on the Chinese currency over the past months.

The yuan hit its lowest level against the dollar this year on Tuesday after falling nearly 1 percent to the bottom of its daily trading band.

"The renminbi is assessed to be moderately undervalued, reflecting a reassessment of the underlying current account, slower international reserves accumulation, and past real effective exchange rate appreciation," the IMF report said.