CHINA’S POLICY DILEMMA

CHINA FACES POLICY DILEMMA IF AUGUST DATA AS BAD AS EXPECTED

Koh Gui Qing

Reuters, September 7, 2012

BEIJING (Reuters) - A deluge of data out of China on Sunday could confirm investors' worst fears that a downswing in the world's second-biggest economy has stretched into a seventh straight quarter, leaving global markets with no respite from the gloom.

But any hope that the data, covering August, will spur Beijing to shore up the economy by cutting interest rates may be misplaced, as inflation is expected to accelerate, albeit from low levels.

The awkward combination of rising prices while growth in exports and factory output wilts puts Beijing in a policy dilemma: relax policy and risk an inflation spike, or stand still and risk a sharper cooldown in activity.

With the Communist Party's once-a-decade leadership change looming, it could happen as early as next month, analysts fear China could fall prey to "policy paralysis".

Despite growing evidence that the economy needs new stimulus measures to regather momentum, policymakers could opt to hold fire out of fear that a surge in prices could stoke social unrest at a politically sensitive time.

Goldman Sachs reflected that pessimism on Thursday by lowering its growth forecasts for China's gross domestic product (GDP) for this year and next.

Other analysts say they will follow suit if Sunday's inflation, factory output, fixed-asset investment and retail sales data for August are as bad as thought.

"Growth is bouncing along the bottom and we haven't seen any convincing signs that a rebound is underway," said Mark Williams, an analyst at Capital Economics in London.

"We haven't had a spurt in lending in the past few months. The government hasn't become more active with fiscal policy. The global economy hasn't picked up."

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