Business

China set for tepid recovery in 2013, inflation to pick up

China’s national flag flies on Tiananmen Square on a hazy day in Beijing, January 23, 2013. The country’s economic growth is likely to rebound to 8.1 per cent in 2013 from 7.8 per cent last year, a poll shows. – Reuters picChina’s national flag flies on Tiananmen Square on a hazy day in Beijing, January 23, 2013. The country’s economic growth is likely to rebound to 8.1 per cent in 2013 from 7.8 per cent last year, a poll shows. – Reuters picBEIJING, Jan 23 – China’s economic growth is likely to rebound to 8.1 per cent in 2013 from 7.8 per cent last year, the weakest pace in 13 years, but the recovery could fizzle in 2014 as a pick up in inflation forces the central bank to revert to modest policy tightening, a Reuters poll shows.

The median forecast by 44 economists polled by Reuters was for annual economic growth to accelerate to 8.1 per cent in the first quarter and quicken further to 8.2 per cent in the second and third quarters, before slowing to 7.9 per cent in the final quarter.

The world’s second-largest economy expanded an annual 7.9 perc ent in the fourth quarter of 2012, snapping seven consecutive quarters of weaker growth, as a raft of pro-growth policies kicked in.

“Continued policy easing would be needed to prolong the acceleration through 2013 but this seems unlikely to happen. As a result, we believe that GDP growth will end the year slower than it starts,” Mark Williams, Chief Asia Economist at Capital Economics, said in a note to clients.

The latest forecast is stronger than the previous poll in October when economists expected China’s economy to grow 7.8 per cent this year and 7.7 per cent the next year.

The annual growth rate is likely to be steady at 8.1 per cent in 2014, according to the median consensus.

The poll also produced a consensus view that consumer inflation would quicken to 3.2 per cent in 2013 and 3.5 per cent in 2014 from last year’s 2.6 per cent, reinforcing the case that Beijing may be left with limited scope to further loosen policies, which could exacerbate inflationary pressure.

Economists said the extent and durability of the current recovery will hinge mainly on Beijing’s credit and property policies this year.

“Later in the year, as the government gets more concerned about rising housing prices and recovering inflation, and as shadow banking credit activities are more tightly supervised, liquidity is likely to be tightened and growth momentum is expected to slow,” said Tao Wang, an economist at UBS in Hong Kong.

Given that China is facing inflationary pressures and rebounding property sales, analysts said the central bank would likely hold benchmark rates and banks’ reserve requirement ratios (RRR) unchanged this year.

NO BANK RESERVE OR RATE MOVES IN 2013

The central bank is expected to keep the benchmark one-year bank lending rate at six per cent until the end of 2013, while keeping one-year bank deposit rate unchanged at three per cent, according to the median forecast of 26 analysts.

The analysts said the central bank would also likely hold banks’ reserve requirement ratios (RRR) unchanged throughout 2013.

The previous poll in October showed analysts expected the central bank to hold interest rates steady in 2013, but it could cut RRR once, or by 50 bps, to 19.5 per cent, during the year.

Chinese leaders may shift their focus towards deepening structural reforms in 2013 as the economy picks up gradually, said Connie Tse, an economist at FORECAST Pte in Singapore.

“An important part of this year’s recovery outlook depends on the strength of domestic growth, with investments and private consumption as the key potential drivers, as well as a stabilizing external outlook,” Tse said.

“As China has held off from cutting lending/deposit rates in the fourth quarter of 2012, the reason for such a move seems to be even less compelling in 2013.”

The central bank, which cut interest rates twice in mid-2012 and reduced banks’ reserve ratios three times since late 2011, has since switched to short-term cash injections via open market operations to guide monetary policy, apparently fearful of fanning price pressures or encouraging a property bubble.

It may start tightening policy in 2014 by raising interest rates once in the second quarter to help temper inflation, according to the poll.

That would bring the one-year bank lending rate to 6.25 per cent and one-year deposit rate to 3.25 per cent. – Reuters

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