China has ample power to bolster growth

BEIJING - Chinese importers' call to postpone the delivery of key materials has alarmed the world with a worse-than-expected slowdown in China that risks triggering another recession.

Delayed purchases by Chinese importers have aroused concerns that China's economic slowdown may continue to accelerate. Its first quarter GDP growth fell to an almost three-year low of 8.1 percent.

The downside trend is worrying, as Premier Wen Jiabao stressed in a recent speech. But a closer analysis of China's economy reveals that the government has a slew of policy measures in reserve to keep the economy on the right track.

Acknowledging the "increasing downward pressure," a State Council meeting presided over by Wen on Wednesday outlined a slew of policy levers that may be implemented to stabilize growth amid external jitters.

China has more buffers on the fiscal policy side than many other economies, as well as more room for monetary easing after the recent tightening cycle, analysts said.

Fearful of reawakening the inflation dragon fed by a 4-trillion-yuan ($635 billion) stimulus package that pulled China out of the global financial crisis, the government has moved very cautiously in fine-tuning its monetary policy, making three delayed cuts in the reserve requirement ratio to allow banks to lend more after hiking the ratio 13 times since the crisis began.

A second stimulus program seems unlikely. Liu Yihui, an expert with the Financial Research Center of the Chinese Academy of Social Sciences (CASS), said the government will avoid drastic changes in its monetary policies to guard against a possible inflation rebound.

But the central bank can still continue to cut the reserve requirement ratio for banks and lower interest rates if the external environment deteriorates further, Morgan Stanley said in an updated report on China's economy.

China's benchmark interest rate stands at 3.5 percent, much higher than the ultra-low rate of zero to 0.25 percent kept in the United States and zero to 0.01 percent in Japan.

In addition to high-caliber loosening, China has pinned its hopes on proactive fiscal measures to buoy the economy, as its government debt ratio, which is significantly lower than that of other nations, allows more room for spending.

The State Council said China will adopt more fiscal measures targeted at boosting domestic demand, including the initiation of major projects outlined in the 12th Five-Year Plan (2011-2015) to fuel infrastructure investment and structural tax reduction.

Over the short-term, fixed asset investment, one of China's key growth drivers, will be the centerpiece of government stimulus plans, said Li Huiyong, chief macroeconomic analyst at Shenyin & Wanguo.

China will channel more investment into infrastructure projects, Morgan Stanley said, predicting a total investment of 20 trillion yuan in government-led infrastructure projects under the five-year plan.

Aware of barriers for sustaining balanced growth in the long-term, China is also moving to push for deeper structural reforms, such as taxation reduction and opening floodgates for private investment, although these policy options will need firm dedication at all levels of government.

Gao Peiyong, head of the CASS's National Academy of Economic Strategy, estimated a total of 600 billion yuan, or about half of the government's budget deficit, in structural taxation reduction this year, which will help ease burdens on enterprises.