BEIJING China will not resort to aggressive policies to stimulate its cooling economy in 2012, with only a sharp slowdown in growth below 8 percent likely to trigger interest rate cuts or fresh fiscal spending, according to a new Reuters poll.
All 19 economists polled by Reuters believe China will instead reverse more of the monetary tightening it used to tame inflation over the last year and cut the ratio of deposits banks are required to keep as reserves.
Only four economists believe the central bank will lean on interest rate cuts to help ease credit conditions in China next year to reinvigorate growth, which is widely forecast to fall to its slowest pace since 2001.
None of the analysts believed Beijing would opt to devalue the yuan to support struggling local exporters.
"The central bank will rely on quantitative policy tools -- the amount of maturing central bank bills will be relatively small in 2012, so it will be reflected in RRR cuts," said Nie Wen, an economist at Hwabao Trust in Shanghai.
The central bank announced its first cut in reserve ratios for commercial banks in three years on November 30, a clear policy shift after a vigorous tightening campaign to curb inflation which hit a three-year high of 6.5 percent in July and still remains above the official target of 4 percent.
The RRR remains at 21 percent for big banks, giving the central bank plenty more room to cut and free up funds that could be used for lending.
The consensus among analysts polled by Reuters is for a total of 200 basis points of RRR cuts by the end of 2012 to 19 percent.
However, some believe the central bank will move more quickly to roll back a chunk of the 600 bps it added to RRR in 12 hikes between January 2010 and June this year.
"The RRR will fall to 18.5 percent by the end of Q1 2012," said Standard Bank China economist, Jeremy Stevens. "We expect at least one reduction in the RRR -- plausibly by a full percentage point -- before Chinese New Year (Jan 23)."
A Reuters poll conducted in late November, ahead of the central bank's RRR cut, showed that analysts had expected the ratio to fall to 19.5 percent by the end of 2012.
Investors hoping for an outright cut in interest rates might have to wait a while. A majority of 10 respondents forecast no cut in official rates in 2012.
INFLATION RISKS IMPEDE EASING
The battle against inflation clouds the view.
Expectations of fresh easing steps were fanned last week by data showing annual inflation tumbled in November as food costs fell, while factory output growth was its weakest in more than two years as economic conditions deteriorated.
Although inflation has eased to 4.2 percent in November, it is running at an average rate of 5.5 percent in 2011, leaving limited room to manoeuvre on interest rates for a government hyper-sensitive to the risks of social unrest that have been triggered by past episodes of upwardly spiralling prices.
Preserving consumer spending power is also a policy concern given that real returns on bank deposits are negative, with one-year benchmark deposit rates at only 3.5 percent.
Cutting interest rates could prompt savers to pull money out of the banking system in search of better returns elsewhere and further crimp bank lending.
STIMULUS SWING FACTORS
The swing factors for a shift in the policy stance towards "stimulative" from the declared "fine-tuning" of the last two months would be quarterly economic growth slipping below 8 percent, a fall in inflation to or below 3.5 percent, or an evident popping of a real estate bubble that the government is trying to gradually deflate.
Economists typically view growth of 7 to 8 percent as the bare minimum needed to generate enough jobs to help China absorb the urban influx of rural migrants and maintain social harmony.
The Reuters poll revealed a consensus view that the government is increasingly focused on supporting domestic demand, rather than trying to manufacture conditions that could compensate exporters for evaporating demand in the debt-ridden European Union -- China's biggest export market.
"Housing prices falling to a 'reasonable level' would allow the authorities to declare victory and scale back some of the April 2010 (real estate tightening) measures, which would be a major easing as housing spending would translate into stronger domestic demand," said Tim Condon, head of Asian economic research at ING in Singapore.
On the fiscal front, analysts discounted the possibility of huge stimulus as Beijing struggles to deal with the hangover from its 4 trillion yuan stimulus package unveiled in 2008, which has led local governments across China to rack up debt officially estimate at 10.7 trillion yuan.
The minority of analysts believe Beijing will have to open its purse strings probably at the end of the second quarter of 2012, but the stimulus could be conducted mainly through tax cuts and be much smaller that the previous package, probably around 1.25 trillion yuan.
In terms of the sectors that could benefit the most, analysts listed affordable housing, railways, social security, environment protection as well as small businesses.
"Unlike the previous round, this time around the government will focus more on social welfare programmes and tax incentives which will help facilitate the economic transformation," Todd Lee, chief China economist at IHS Global Insight said.
The ambition of China's leadership to shift the engine of growth of the economy towards domestic consumption and reduce the contribution of exports by increasing imports to rebalance its overall trade position was cited as a key reason that any policy easing would not be channelled through the yuan exchange rate.
(Additional reporting by China economics team and Anooja Debnath in Singapore; Editing by Nick Edwards and Vidya Ranganathan)
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