Chinese Premier Wen Jiabao believes there's more room for fiscal and monetary policy to support growth, saying the nation has full confidence it will meet its economic goals for the year.

“Be it monetary or fiscal, we still have ample strength,” Wen said yesterday at the World Economic Forum in the Chinese city of Tianjin. The government has 100 billion yuan ($16 billion) in a fiscal stabilisation fund and “we will appropriately use that for preemptive policy and fine-tuning to propel stable economic growth,” he said.

The government is trying to prevent growth this year from slipping below the 7.5 per cent target set in March, which would already be the weakest since 1990. Economists at Barclays Plc and UBS AG lowered expansion forecasts as Wen grapples with slowing industrial output and export gains, increasing pressure to ease policy.

“The government has fiscal and monetary war chests to revive growth but there does not seem to be much appetite to roll out a large-scale stimulus package,” said Wang Qinwei, a London-based economist with Capital Economics who previously worked at the People's Bank of China.

The country will continue to place more emphasis on ensuring stable growth, Wen said. He reiterated that China will maintain a proactive fiscal policy and prudent monetary policy and said the nation has implemented a series of steps to promote domestic demand.

Monetary Easing

Officials in China have refrained from easing monetary policy since cutting interest rates in June and July and lowering banks' reserve requirements three times from November to May. Authorities have shied away from stimulus near the scale of a 4 trillion yuan package announced in 2008, amid a global crisis when 20 million migrant workers lost their jobs.

China needs to “moderately lower” interest rates, Li Daokui, a former central bank adviser, told reporters in Tianjin yesterday. Growth will pick up in the fourth quarter and China's new infrastructure investment plans will benefit expansion at the start of next year, he said.

Inflation that accelerated for the first time in five months in August may limit any monetary easing.

The government last week said it approved subway and road projects across the country. Wen last month urged extra measures to support exports and help meet economic targets as a decline in industrial companies' profits added to evidence that the nation's slowdown is deepening.

Forecast Cuts

UBS and ING Groep NV on September 7 cut their full-year forecasts for economic expansion to 7.5 per cent. The deceleration in China's growth will probably extend into a seventh quarter, based on projections from ING and Bank of America Corp.

The benchmark Shanghai Composite Index (SHCOMP) of stocks fell 0.7 per cent yesterday and is down 14 per cent in the past year.

Asia's biggest economy expanded 7.6 per cent in the second quarter from a year earlier, the slowest pace in three years, after the government moved to counter inflation and surging property prices in the wake of the 2008 stimulus.

The last stimulus resulted in a “large hangover in the form of worries about bad debt and overinvestment,” said Wang of Capital Economics. “The authorities are now increasingly aware that stimulus only worsens China's economic imbalances.”

Europe's debt crisis and anaemic US growth may hinder a rebound in exports while at home a slump in earnings is deterring companies from spending and banks face rising bad debts.

Downward Pressure

President Hu Jintao said September 8 that economic expansion faces “notable downward pressure,” some small and mid-sized companies are “facing a hard time and exporters are facing more difficulties.”

Companies including China Cosco Holdings Co, China's largest listed shipper, are bearing the brunt of weakness in exports. The company lost 4.87 billion yuan in the first half and its top two executives pledged to waive their salaries until profits resume.

China's exports rose less than 3 per cent for a second month in August while imports had the first non-holiday decline since 2009 as the nation's slowdown and Europe's turmoil curbed demand at home and abroad. At the same time, new yuan loans were the highest of any August on record.

Bloomberg