Dampening indicators forecast more incentive measures

Major research institutions have mostly lowered their forecasts for China's second-quarter growth to below eight percent after the purchasing managers index (PMI) for both manufacturing and non-manufacturing sectors slowed further.

Institutional reports and economists' views generally held that there should be no surprises in store when the major economic indices for May are released on Saturday.

The China International Capital Corporation and the Bank of Communications are among a number of institutions to have lowered their forecasts to 7.8 percent, expecting no immediate improvement in investment, export, consumption and other indices in May. The growth of investment in fixed assets may even be lower than 20 percent.

The PMI of the country's non-manufacturing sector, released on Sunday, dropped 0.9 percentage points to 55.2 percent in May, which was the second consecutive month of decline

The figure followed Friday's release of PMI data for the country's manufacturing sector, which ended five consecutive months of growth and dipped to 50.4 percent in May from 53.3 percent in April, barely above the contraction mark of 50 percent.

It should be especially noted that prices in almost all sectors, including resources, industrial products and food, fell sharply in May, largely alleviating inflation pressure. Institutions generally predicted that the May consumer price index (CPI) will continue to fall from 3.4 percent in April to 3.1 percent or 3.2 percent, and is expected to be lower than three percent in June.

Xu Lianzhong, an economist from the price monitoring center of the National Development and Reform Commission, said the CPI for 2012 will be 3.0 percent to 3.5 percent.

This leaves room for the government to adopt more policies to stabilize economic growth. Many institutions have suggested that measures including energy-saving consumption subsidies, new investment projects, capital support for low-price housing, and allowing private investment in state-owned sectors are feasible choices to stimulate domestic demand.

Lian Ping, chief economist of the Bank of Communications, said that interest cuts are strongly expected in the market, but the basics of monetary policy would not change. It will be possible for the reserve ratio of bank deposits to be lowered one to three times within the year.

He said the central bank may cut the interest rate of loans to lower enterprises' financing cost, but deposit rates will remain unchanged.

China's capital markets are expecting policy incentives as well. In recent weeks, stocks in businesses related to infrastructure construction, such as cement and machinery, have been rising strongly.