China growth risks signal need for fiscal action

Lu is struggling to understand why the April data was so far away from market expectations and thinks a new reporting system requiring China's 700,000 biggest manufacturers, representing 90 percent of the total value added in the factory sector, to submit numbers directly the National Bureau of Statistics in Beijing - rather than local offices - might be the root cause.

Whatever is behind the drop-off, the new consensus view is that Beijing will have to raise its game to stop the rot.

Especially as trade data earlier in the week saw an annual rate of export growth around half the level expected and growth in imports grinding to a halt on a nominal basis in April, underlining China's vulnerability to weakness in global demand for goods produced in the country's vast factory sector.

"The April data reconfirmed our view that the first quarter was not the bottom. If anything, the trend seems to be slightly worse than what we had priced into our call for 7.8 percent year-on-year real GDP growth in Q2," Yao Wei, China economist at Societe Generale in Hong Kong told Reuters.

Yao expects action on three fronts - accelerating infrastructure investment, easing property tightening policies and rolling out a package of tariff cuts and consumption incentives.

Credit demand key

Whatever Beijing's fiscal response, few expect stimulus spending modeled on the 4 trillion yuan ($635 billion) splurge unveiled in the wake of the 2008-09 global financial crisis, which buoyed growth but triggered spikes in inflation and real estate speculation that the government spent two years correcting.

Meanwhile further easing in monetary policy is likely to have to boost demand for credit, rather than simply making it available. Chinese banks need to lend about 850 billion yuan in both May and June to hit the 2.4 trillion yuan Q2 lending quota the market believes Beijing is working towards.

Monthly loan growth of 800 billion has only been achieved eight times since 2004, five of those occasions while China was rolling out its 4 trillion yuan stimulus program.

That, for many analysts, makes a fiscal response more likely given the government's deep pockets after a record tax take in 2011 and a modest deficit target of 1.5 percent of GDP - especially as going down that route makes it easier for Beijing to order loans to be extended to hit the credit creation target.

"A quickened and strengthened policy stimulus is key for stabilizing China's growth in the coming months. Chances of more aggressive easing have increased," analysts at HSBC said in a client note.

"The immediate delivery of RRR cut right after the weak April data suggest that Beijing is responding actively. We expect more aggressive delivery of policy stimulus via quantitative easing, substantial tax breaks, fiscal spending and investment deregulation in the coming months to ensure a soft landing." ($1 = 6.3106 Chinese yuan)