Qu Hongbin, economist, HSBC:
With inflation quickly shifting to disinflation, growth stability tops the policy agenda with calls for more aggressive easing measures. Inflation, as measured by the consumer price index and the producers price index, has fallen rapidly in recent months. But growth is also decelerating and the latest leading indicators point to a further slowdown in 2012. The European debt crisis and falling property prices will only add to downside pressure on growth. This means Beijing has to respond decisively to stabilize growth and the job market.
We expect the central bank will pursue across-the-board easing. As with the policy tightening cycle, we expect quantitative tools to be used…. Second, we expect fiscal policy to be as, if not more, important than monetary policy. Total fiscal revenue surged nearly 27 percent year over year in the first 11 months of 2011 and the central government’s net cash position has topped around RMB 4 trillion (nearly 9 percent of GDP). This puts Beijing in a strong fiscal position to cushion a slowdown in growth. Watch for tax cuts for small and medium-sized enterprises (equivalent of around 1 percent of GDP), additional spending on public housing and ongoing infrastructure projects, and more subsidies for poor rural households.
We also expect the municipal bond trial to be rolled out nationally next year. Combined with the transfer of more funds from the central government, this should help finance public housing and mitigate the liquidity risk of local government debt. These measures, plus continued investment in existing infrastructure projects, should keep GDP growth above 8 percent in the coming years, although the crisis in Europe will probably slow export growth.
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