Chinese authorities need to raise economic game: analysts

[BEIJING] Slowing growth, slumping stocks, suspect data: the world's second-largest economy is sending shockwaves through global markets, and flailing authorities appear increasingly asleep at the wheel, say analysts.

The Shanghai Composite Index recorded its biggest fall for more than eight years on Monday, renewing the plunges in China's benchmark stock index.

It comes as pessimism about the state of the country's broader economy is intensifying, forming a lethal combination that has sent global markets into a tailspin.

China's leadership for years has claimed credit for transforming the economy with decades of double-digit growth.

But now its huge rescue programme is failing to effectively support the stock market, and measures that might help instil much needed confidence in the real economy - such as cutting taxes and lowering interest rates much further - are missing in action.

Ultimately authorities had to restore faith that they have a grip on the situation, said Christopher Balding, an economist at Peking University's HSBC Business School in Shenzhen.

"They need to demonstrate much better leadership on this issue," he told AFP, stressing that someone needs to be put "in charge in coming out with a consistent message".

Much more aggressive interest rate cuts were needed, he added, with producer prices falling 5.4 per cent year-on-year in July, the 41st consecutive month of factory gate deflation.

China's economic growth has been on a clear downward trend for several years, something many see as a desirable development that, with consumer spending rather than investment driving growth, will be more sustainable than the breakneck pace of the past.

But such a change takes time and retail activity has yet to step up to completely fill its expected role, even as investment growth slows.

Andy Xie, a Shanghai-based independent economist formerly with Morgan Stanley, told AFP authorities should cut taxes by up to two trillion yuan (S$442 billion) for several years, citing similar moves by the United States in 2008 in response to the global financial crisis.

"That's a very powerful way to stimulate consumption," he said.

"It's just a madness now," he added. The Chinese government, he said, "is not focusing on the economy. The government's mind is somewhere else."

China's ruling Communist Party and government are currently devoting much of their attention to a massive military parade next week to commemorate the 70th anniversary of Japan's defeat in World War II, mobilising hundreds of thousands of Beijing's citizens in preparation.

As recently as 2011, China's gross domestic product (GDP) expanded 10.6 per cent but that slowed steadily to 7.4 per cent last year.

A surprisingly upbeat 7.0 per cent GDP growth figure announced last month for the April-June quarter - matching the government's official annual target - came despite several disappointing indicators earlier.

A surprise yuan devaluation earlier this month - which should boost exporters - led to fears the situation was worse than portrayed, exacerbated when a manufacturing survey last week reached its lowest for more than six years.

The government has taken consistent policy steps to make sure the ongoing slowdown does not get out of hand, such as cutting benchmark interest rates four times since November and also reducing the amount of funds banks must keep on hand in a bid to increase lending.

Brian Jackson, Beijing-based economist with IHS Economics, stressed that the government has had some policy success, citing an overall stable construction sector and rebounding housing demand.

"Most other parts of the economy have indeed slowed in the past year, but only gradually," he wrote.

"In any case, we don't view China's stock market as a very good indicator of the overall health of the economy, given it remains so trivial in its linkages to the rest of the economy."

But Liu Li-Gang, ANZ's chief China economist, called the government's reluctance to take more aggressive steps "very strange", emphasising confidence was declining.

The government's willingness to deploy billions of yuan to defend the stock market while restricting spending on underlying fundamentals, was "very much misguided", he said.

"The current policy is being carried out by a bunch of inexperienced people, which has caused this mess. They would rather pile all this money into the virtual economy instead of the real economy," he added.

"So people's faith in China's economy is lower and lower, which will cause very negative feedback, pressuring global markets and then further weighing on China's."

AFP