China economy shows strain as policy shift eyed

Fri Feb 10, 2012 7:22am EST
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By Aileen Wang and Nick Edwards

BEIJING (Reuters) - China betrayed signs of spluttering domestic demand on Friday as imports crumbling to their lowest in more than two years and weaker-than-forecast bank lending signaled to investors that policymakers would soon make a fresh bid to bolster growth.

China's economic expansion struck a 2- year low of 8.9 percent in the last three months of 2011, extending a steady slowdown that had prompted the government in the autumn to switch policy settings to support growth. It has gently eased monetary and fiscal conditions since.

Now more is needed.

"I think that liquidity conditions are too restrictive. The economy is slowing down and liquidity conditions are restrictive," said Yao Wei, China economist at Societe Generale in Hong Kong.

A fall of 15.3 percent in imports in January compared with January 2011 was the lowest reading since August 2009, while exports fell 0.5 percent over the same period, the worst showing since November 2009, customs data showed on Friday.

That was followed by data from the People's Bank of China showing that new lending was less than 75 percent of the level expected -- a big surprise for a financial system that typically sees its biggest lending splurge of the year in January.

"That supports our view that there should be more RRR cuts," said Kevin Lai, an economist at Daiwa in Hong Kong, referring to the bank reserve requirement ratio. A cut in reserves would release cash into the economy.

"We expect there should be four this year, so we expect the next one very soon," Lai said.   Continued...