* China imports and exports fall to lowest in more than two
* Lunar New Year, slower external demand cited
* New bank lending undershoots forecasts
* Broad money supply growth at its slowest since May 2001
By Aileen Wang and Nick Edwards
BEIJING, Feb 10 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 signalled to investors that policymakers would soon
make a fresh bid to bolster growth.
China's economic expansion struck a 2-1/2 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.
The combination of data points raises numerous worries even
though Lunar New Year holidays fell in January, which can make
it difficult to interpret economic figures.
First, that the domestic demand which has shielded the
world's second-largest economy from slackening exports is not as
resilient as thought. Second, that China's ability to support a
frail global economy by absorbing more imports is undermined.
And third, that weaker-than-expected lending is a function
of banks being at their limit of credit creation, meaning the
central bank will need to expand the range of policy tools
beyond cuts in the reserve requirement ratio and use of open
market operations if it is to effectively boost the supply of
"The trade data, especially imports, show that domestic
demand is slowing quite rapidly. But the lending data is more
indicative of that right now, the capacity to ease liquidity
conditions is not as great as people thought," said Yao.
"Right now the binding constraint is not the required
reserve ratio, but the loan-to-deposit ratio."
Lunar New Year distortions will make policymakers wary of
any hasty reaction. Most analysts expect them to assess January
and February data combined before deciding whether the current
policy of gentle easing should be intensified.
The week-long Lunar New Year holiday, which fell in January
this year and in February last year, typically sees factories
shut or run at half speed during the period.
But seasonal factors alone do not convince every economist
that January is a one-off distortion, especially for trade.
"A fall of over 15 percent in January cannot be entirely
explained by the Lunar calendar, and adds weight to the view
that economic output is slower than headline indicators might
suggest," said Ren Xianfeng, an economist at IHS Global in
Exports to the European Union, China's top export market,
fell 3.2 percent in January from a year earlier, the first
decline since February last year, the data shows.
Exports to the United States rose 5.5 percent in January
from a year earlier, slowing from December's 11.9 percent rise
and marking the weakest pace since February last year.
The big imports drop combined with a smaller exports drop
left China with a trade surplus of $27.3 billion in January, its
biggest in six months and confounding expectations of a further
Realisation that January would produce a bigger trade
surplus may well have held the central bank back from reducing
the RRR that month, when many economists had expected a cut.
It cut bank reserves by 50 basis points to 21 percent on Dec
5, a move economists believe was a response to rare capital
outflows from China in the fourth quarter of 2011.
China's monetary policy essentially targets a level of
overall money supply which is affected by external capital flows
and internal credit creation.
So broad M2 money supply growth of 12.4 percent in January
-- the slackest pace of expansion since May 2001 -- has
reignited expectations that the central bank will seek to boost
credit before long.
"The weak data may reflect the softening lending demand from
the real economy, which is slowing down on slackening demand at
both home and abroad," said Jiang Chao, analyst at Guotai Junan
Securities in Shanghai.
"But we cannot ignore the uncertainties stemming from the
Chinese New Year effect and should better wait for the February
data to call it a trend."
Other figures on Friday showed China's current account
surplus shrank in 2011, offering Beijing fresh evidence to show
critics of its currency policy that it is relying less on
Chinese leaders can point to the figures next week at a
summit with European Union officials in Beijing, as can
Vice-President Xi Jinping, widely expected to be China's next
leader, who visits Washington on Tuesday.
Xi is likely to hear calls in the United States next week
that Beijing allow the currency to rise at a faster rate. The EU
is also likely to make such calls when it meets China's leaders.
However, a Reuters poll this month suggested such hopes may
be dashed. It showed that China is expected to slow the pace of
yuan gains to help exporters cope with the slowdown in global
China's economic growth slowed steadily throughout 2011. But
the slope of the slowdown was shallow enough for the consensus
to emerge that a hard economic landing will be avoided, even
though many private-sector economists forecast that 2012 will
see the slowest pace of expansion in a decade.
The first quarter of 2012 is widely expected to mark the
bottom of China's economic downswing. Signs from the most recent
purchasing managers index survey showed a slight expansion of
the factory sector in January.
And analysts are wary about forecasting a cut in the RRR too
soon, since data on Thursday showed annual inflation spiked to a
consensus-busting 4.5 percent in January.
"Taken at face value, today's trade data should push policy
makers to loosen policy further. This may well happen if
February year-on-year exports data is still as low but we
believe there will be a large rebound to double-digit levels,"
Yu Song, China economist at Goldman Sachs, said in a note to
Zheng Yuesheng, statistics chief with the customs
administration, told state radio such a rebound was likely.
"Exports and imports in February, before seasonal
adjustment, will see a sharp rise," Zheng was quoted as saying.