Analysis: China growth risks signal need for fiscal action

By Nick Edwards

BEIJING (Reuters) - China may need a back-up plan to stop economic growth being cut short by a surprise dip in demand at home and abroad that suggests monetary policy easing steps taken since the final quarter of last year are insufficient to deal with the downturn.

The People's Bank of China cut the amount of cash that banks must hold as reserves on Saturday, freeing an estimated 400 billion yuan ($63.5 billion) for lending to add to the roughly 800 billion injected in two previous 50 bps cuts since the government tilted its policy stance towards growth in October.

The move came after data on Friday showed the economy weakening, not recovering, from its slowest quarter of growth in three years. Industrial production growth slowed sharply in April and fixed asset investment - a key growth driver - hit its lowest level in nearly a decade, confounding economists expecting signs of a rebound in Q2 data.

"There are risks that policy loosening may under-deliver. If fiscal spending doesn't speed up quickly, GDP growth faces the risk of going below 8 percent in Q2," Zhiwei Zhang, chief China economist at Nomura in Hong Kong, told Reuters.

"The critical factor to watch now is fiscal policy. We expect more policy measures on this front will be announced in coming weeks. Premier Wen said on April 13 that "we need to prepare back-up plans in case growth weakens further". Now that growth has indeed weakened more, it is time for the back-up plans to be rolled out," Zhang said.

April 13 was when China revealed its weakest three months of growth on an annual basis in nearly three years, at 8.1 percent.

Back then many economists, including Zhang, thought that would mark the bottom of China's current downswing - especially as new bank lending data for March published the day before had topped 1 trillion yuan in the strongest showing in a year - and triggered widespread raising of bearish 2012 growth forecasts.

Last week's data, by contrast, saw economists at UBS and Bank of America/Merrill Lynch slash their growth estimates within hours of the numbers being published and call for policy action to achieve growth of around 8 percent, widely regarded as government's aim, rather than the 7.5 percent official target.