China May Cut Rates as Recovery Falters, Capital Economics Says
China may resume interest-rate cuts from mid-year as consumer and producer prices fall and hopes fade for a rapid rebound in the world’s third-biggest economy, Capital Economics Ltd. said.
Deflation means “real rates have risen sharply,” London- based economist Mark Williams said in a note e-mailed late yesterday. “If the recovery disappoints, further interest-rate cuts could resume from the middle of the year.”
Credit Suisse Group AG said this week that China’s recovery began to stall in the second half of last month and the World Bank cautioned against “premature” enthusiasm. Those views contrast with a 44 percent rally in the Shanghai Composite Index, driven by optimism that government-led investment will revive growth after trade collapsed.
The key one-year lending rate is 5.31 percent after five cuts in the final four months of last year. The first was as Lehman Brothers Holdings Inc. filed for bankruptcy and the central bank followed up with the biggest single reduction since the 1997-98 Asian financial crisis.
Williams predicts 81 basis points of cuts in both lending and deposit rates by year’s end after consumer prices fell for three straight months and producer prices declined by a record in April.
“Huge growth” in new project announcements because of the government’s 4 trillion yuan ($586 billion) stimulus package may not yet have generated spending gains of the same size, Williams said business card design. “While growth appears to have stabilized, there is no sign of a rapid rebound.”
Stocks May Fall
China’s economic recovery is slowing further this month, raising concern that the rebound won’t be as “strong as many recently have hoped” and adding to the likelihood of a decline in stocks, according to Credit Suisse.
Retail industries including electronics and department stores have weakened, adding to a slump in power consumption, Dong Tao, a Hong Kong-based economist, said in a report.
“The pace has slowed, even reversed in some sectors,” Tao said. “The trend has become more visible in May.”
Manufacturing may falter in coming months after expanding in March and April, Tao said. The Purchasing Manager’s Index, or PMI, rose to 53.5 in April from 52.4 in March. A reading above 50 indicates an expansion.
“The PMI runs a risk of slipping below 50 over the next few months,” Tao wrote.
China’s economy expanded 6.1 percent in the first quarter, the slowest pace in almost a decade. Overseas shipments declined 22.6 percent in April from a year earlier, the customs bureau said last week.