As well as local inflation and the health of Europe, the Reserve Bank has also been concerned that China’s attempts to slow its strongly growing economy, might come unstuck.
We know consumer and wholesale price inflation in Australia is easing, Europe is improving and yesterday the Chinese economy got a tick from the country’s central bank and the International Monetary Fund.
The attitude of The People’s Bank of China (PBOC) was understandable; it would be very rare for it to tell the world that the economy was going to hell in a hand basket.
But its judgment is backed by what we have learned from the flow of economic data in the past month.
That’s why we can readily believe the PBOC when it says that while it is possible for China’s economic growth to slow, the chance of a "double dip" is slim.
It said in its latest quarterly report on its website that current economic developments have revealed signs of a slowdown in the country’s growth, though the economic fundamentals remain strong.
The bank said it made this judgment based upon the purchasing managers’ index for the country’s manufacturing sector remaining above the boom-bust line of 50, although the pace of the increase has slowed in the past couple of months.
(Another PMI is out for China on Monday or Tuesday, along with similar surveys for Australia, Europe and the US, all of which will test sentiment.)
As well, the bank said investment and retail sales continue to show strong growth and the global economy is improving, and little impact is seen from the European sovereign debt crisis on China’s economy.
GDP rose 10.3% year on year in the second quarter, down from the 11.9% annual rate in the first quarter, and compares to the 10.7% rate in the final quarter of 2009.
The PBOC report said the current slowdown in China’s GDP growth was a correction following the earlier excessive expansion and also a result of the government’s macro regulations that aimed at curbing steep property price increases, easing local government debt risks and avoiding possible inflation.
"It is good for rebalancing the economic structure and achieving a sustainable economic growth," the report said.
The central bank said the country’s new bank lending would be within the 7.5-trillion-Yuan (1.1 trillion US dollars) target in 2010 if the increase is maintained at the June level.
In a separate report, Finance Minister Xie Xuren said on Tuesday that China’s "proactive fiscal policy" will continue for the rest of the year.
He said the spending would focus on supporting agriculture and technological innovation, as well as environmental projects.
He was also quoted as saying regulations and other policy initiatives would continue to try to boost domestic demand, through moves such as continuing a subsidy for rural residents buying home appliances.
Meanwhile the International Monetary Fund says China’s stimulus policies had boosted the global economy during a global downturn and that growth this year will be an unchanged 10.5%.
The IMF indicated China’s growth outlook remains favourable and commended Beijing’s measures to contain property price inflation, though it also cautioned a need to safeguard the balance sheet of the domestic banking sector, according to a summary of comments by the IMF’s 24-person executive board on China’s policies.
The report comes after China said on June 19 it would strengthen the flexibility of the Yuan exchange rate, in effect dropping the currency’s peg to the dollar that had been in place since the middle of 2008 due to the global financial crisis.
The Yuan has risen less than 1% against the dollar since the announcement. There seems to have been some disagreement on the question of the value of the Yuan in the report.
The IMF also said that a stronger Chinese currency following Beijing’s recent decision to let the Yuan trade more freely would help the country shift from dependence on exports and investment to private consumption as the primary driver of growth.
"Several directors agreed that the exchange rate is undervalued," the report said, without revealing the countries they represented.
Several IMF officials said the US, Germany, France and Britain were among those who took that position, the Wall Street Journal reported.
"However, a number of others disagreed with the staff’s assessment of the level of the exchange rate, noting that it is based on uncertain forecasts of the current account surplus," it said.
"The policy challenge now is to calibrate the pace and sequencing of exit from the fiscal stimulus and credit expansion, while making further progress in reorienting the economy toward private consumption," the Washington-based IMF said in a report after annual consultations with China.
"The IMF’s executive directors supported a "gradual phase out of the fiscal stimulus in 2011, provided the current trajectory for the economy is maintained," the report said.
China in 2008 unveiled a $US586 billion stimulus package along with big tax breaks to boost domestic spending as the global slump bit following a financial crisis stemming from a US mortgage meltdown.
The assessment was in line with recent IMF comments
