Weak demand for products adds to case for more stimulus

Workers assemble products at the Logitech International factory in Suzhou, Jiangsu province

Chinese policymakers face mounting pressure to support economic growth after an unexpectedly large drop in exports last month and the steepest decline in producer prices in almost six years.
China’s producer-price index fell 5.4 percent year on year in July, according to National Bureau of Statistics data released yesterday. The decline – the biggest since October 2009 – came on the heels of trade data Saturday that showed exports last month shrank 8.3 percent from a year earlier, compared with an estimated decline of 1.5 percent.
The data indicate weak demand for Chinese factory products both at home and abroad and suggest that interest-rate cuts and efforts to stabilize local government finances have yet to spark a recovery. The People’s Bank of China has lowered interest rates four times since November to support an economy expected to grow this year at the slowest pace since 1990.
“The goal this year is to sustain growth, so policies will continue to stimulate demand,” said Zhou Hao, an economist at Commerzbank AG in Singapore.
Maintaining an economic expansion of about 7 percent poses a challenge because the financial sector can’t be expected to surge in the second half like it did during the recent stock market boom, Liu Ligang and Louis Lam, analysts at Australia & New Zealand Banking Group Ltd., wrote in a note yesterday. Chinese stocks have lost almost USD4 trillion in market value since their mid-June peak.
“Monetary policy will need to become more supportive,” the analysts said. They forecast another interest rate reduction this quarter, as well as a cut of 50 basis points to the portion of deposits that lenders must hold in reserve.
Also weighing on growth prospects is a yuan that has maintained its strength against the U.S. dollar even as other major currencies depreciate. China’s exports to the European Union fell 2.5 percent year on year in the first seven months of 2015, while shipments to Japan dropped 10.5 percent. One bright spot was exports to the U.S., which expanded 9.3 percent.
The slump in exports “compounds downward pressure on China’s economy and threatens to bring exchange-rate depreciation onto the table as a tool to restore competitiveness,” Tom Orlik, chief Asia economist at Bloomberg Intelligence, wrote in a research note Saturday.
The PBOC has held a vice-like grip on the yuan, allowing it little movement in the onshore market. The currency’s closing levels in Shanghai last week matched the tightest range recorded since a fixed exchange rate ended a decade ago.
The central bank said in its quarterly monetary policy report Friday that it would let the market play a bigger role in setting exchange rates while keeping them “at a reasonable equilibrium level.”
The government is meanwhile stepping up efforts to spur growth. China plans to issue at least 1 trillion yuan ($161 billion) in bonds to fund construction projects, people familiar with the matter said Aug. 4. Authorities are also expanding policy banks’ lending capacity.
Factory-gate prices of excavated oil and natural gas dropped 34.6 percent in July, while those of ferrous metal fell 20.1 percent, according to NBS. Non-food consumer prices rose 1.1 percent year on year, down from 1.2 percent in June.
“Monetary policies will not change with the price of individual commodities, but will observe the general price trends,” the central bank said in its policy report. Bloomberg