NEWS,18.07.2013

China's growth must be sustained - IMF

China needs another round of "decisive measures" to make sure it continues its successful economic growth as its margins of safety are falling amid growing domestic problems, the International Monetary Fund said in its latest report.
The world's second largest economy has been underpinned by a mix of investment, credit and fiscal stimulus, but such a pattern of growth is unsustainable, the fund said in a report on its annual Article 4 meeting with Chinese officials.
"To secure more balanced and sustainable growth, a package of reforms is needed to contain the growing risks while transitioning the economy to a more consumer-based, inclusive, and environmentally-friendly growth path," the report said.
"While China still has significant buffers to weather shocks, the margins of safety are diminishing."
The IMF didn't change its latest forecast for 2013 growth in China of 7.75%, though it noted downside risks to the forecast. Its figure is above the Chinese government's target of 7.5% and also above most private economists' forecasts of between 7% and 7.5%.
China's new leaders have repeatedly indicated that they are prepared to tolerate slower growth to push through reforms and deregulation to wean the economy off a reliance on exports and investment and encourage more consumption.
That resolve has been tested, however, as growth slowed in the April to June quarter to 7.5%, the ninth quarter in the last 10 that expansion has weakened, and exports fell in June for the first time in 17 months.
Analysts have suggested that the government may step in if growth falls to 7% or below in any quarter, though it is unclear where the government's bottom line would lie.
The IMF said that for the near term, a priority is to rein in broader credit growth and prevent a further build up of risks in the financial sector.
It noted the rise of China's shadow banking system, where credit is available outside regular channels to companies that banks won't lend to, but which risks creating piles of hidden bad debts that become a threat to financial stability.
Banks could be vulnerable in future if asset qualities should worsen. The significant expansion of local government debt levels in recent years is another cause for concern.
The IMF said China's agenda should include accelerated financial sector reforms, a revamp of local government finances, a more market-based currency exchange rate with less intervention, opening more markets to competition and liberalising the capital account.
"With a successful transition, China will grow at a healthy pace for years to come," the report said.
"Activity may be somewhat slower, a trade off worth making for the benefit of much higher income in the medium to long run - a growth trajectory that will also be good for the global economy."

Bernanke: Fed flexible on bond buying

Federal Reserve chairperson Ben Bernanke said on Wednesday the US central bank still expects to start scaling back its massive bond purchase programme later this year, but he left open the option of changing that plan if the economic outlook shifted.
While sticking closely to a timeline to wind down the bond buying that he first outlined last month, Bernanke went out of his way to stress that nothing was set in stone.
"Our asset purchases depend on economic and financial developments, but they are by no means on a preset course," he told the House of Representatives Financial Services Committee.
Under the plan Bernanke laid out on June 19, the US central bank would likely reduce its monthly bond buys later this year and halt them altogether by mid-2014, as long as the economic recovery unfolds as expected.
He did not depart from that guidance on Wednesday, but he said the current $85 billion monthly pace of purchases could be reduced "somewhat more quickly" if economic conditions improved faster than expected. On the other hand, it "could be maintained for longer" if the labor market outlook darkened, or inflation did not appear to be rising toward the Fed's 2% goal.
"Indeed, if needed, the (Fed's policy) committee would be prepared to employ all its tools, including an increase (in) the pace of purchases for a time, to promote a return to maximum employment in a context of price stability," Bernanke said.
The remarks lifted US stock prices modestly and government debt prices also rose. The dollar firmed against the euro and the yen.
"There is something in these comments for everybody," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "Bernanke has done a good job of leaving himself plenty of maneuver room in terms of policy."
Bernanke's testimony to Congress on the Fed's semi-anual monetary policy report may be his last if he steps down when his term as chairman ends in January, as many expect, and a number of lawmakers lauded him for his service.
Under Bernanke, the Fed has held overnight interest rates near zero since December 2008 and more than tripled its balance sheet to about $3.46 trillion with bond purchases aimed at driving down longer-term borrowing costs and spurring investment and hiring.
Calming the waters
Bernanke set off a brief but fierce global market sell-off last month when he outlined the Fed's plans to curtail its so-called quantitative easing, and he has joined a slew of officials since then who have spelled out their intention to keep rates near zero well after the bond buying ends.
Bernanke acknowledged that one of his motives in talking about tapering last month had been to head off a possible bubble in financial markets. Many economists had suspected that had been an important reason.
"Not speaking about these issues would have risked a dislocation, a moving of market expectations away from the expectations of the (Fed's policy) committee. It would have risked increased build-up of leverage or excessively risky positions in the market," he said.
While the end of the Fed's bond buying may be in view, Bernanke repeated that officials will keep rates near zero at least until the jobless rate, which stood at 7.6% in June, falls to 6.5%, as long as inflation remains in check.
He also said the Fed would look closely at any decline in unemployment to see whether it was being driven by strength in hiring or a decline in the number of Americans looking for work, in which case the central bank would be more patient before raising rates.
Any rate hike cycle, he said, would be gradual.
"We intend to be very responsive to incoming data, both in terms of our asset purchases - but it's also important to understand that our overall policy, including our rate policy, is going to remain highly accommodative," Bernanke said.
The testimony led traders in futures markets to push back their expectations for when rates will rise to December 2014 from as early October 2014 a day earlier. The Fed said last month that 14 of its 19 policymakers do not believe it would be appropriate to raise rates until sometime in 2015.
As for bond purchases, economists on Wall Street expect the Fed to start reducing them at its meeting in September.
Speaking about the Fed's bloated balance sheet, Bernanke suggested the central bank would hold the government bonds it has bought for a long time, if not to maturity, and reinvest any proceeds to keep its balance sheet from shrinking quickly.
Recovering at a modest pace
Some Fed officials have been concerned about the low level of inflation and have expressed a hesitance to trim bond purchases until inflation quickens. The central bank's preferred price gauge is a full percentage point below its target.
Bernanke repeated his view that transitory factors appeared to be restraining price gains, although he said policymakers were aware that very low inflation raised the risk of an outright deflation, which could sap the economy's strength.
Data on Tuesday showed that inflation firmed last month, and hiring in recent months has been relatively strong.
However, the government said on Wednesday groundbreaking for homes fell to a 10-month low. In addition, retail sales were weak in June, and second-quarter GDP growth is expected to come in at around a dismal 1% annual rate, painting a very mixed picture for Fed policymakers.
Bernanke, who appears for a second day of testimony before the Senate Banking Committee on Thursday, said the economic recovery was continuing at a moderate pace thanks to a generally stronger housing sector, which was helping conditions in the labor market improve gradually.
He also repeated that the Fed felt the risks to the economy had decreased since the fall.
But he said higher taxes and cuts in federal spending could exert a larger drag on growth than expected, and that worsening conditions overseas could hurt conditions back home.
"With the recovery still proceeding at only a moderate pace, the economy remains vulnerable to unanticipated shocks, including the possibility that global economic growth may be slower than currently anticipated," Bernanke said.

Bernanke hearing turns into 'eulogy'

With a smile periodically playing across his face, Ben Bernanke almost looked pleased to face questions from members of the US House of Representatives on Wednesday, but that might be because he knows that it was for the last time.
During a hearing described several times as more like a eulogy than testimony on monetary policy, the Federal Reserve chief received bi-partisan thanks for his service as successive members said they had heard he may not be in the job next year.
Bernanke has kept silent about his future plans, but he is widely expected to depart when his current term as Fed chairperson expires on January 31. Nor has he pushed back against perceptions that he is ready to return to private life.
That impression was reinforced last month by President Barack Obama, who said Bernanke had already stayed in office "a lot longer than he wanted".
"I feel a little bit like Bette Midler, the very last guest on the very last episode of The Tonight Show that Johnny Carson hosted. She famously quipped to Carson, 'You are the wind beneath my wings," said Washington state Democrat Denny Heck.
"There's some application to that ... as it relates to the economy and I thank you for your service," he said.
Another Democrat, Al Green from Texas, pleaded with him not to go, while it was suggested that T-shirts for his retirement party be printed with the logo "$34 trillion" to celebrate the amount of US household wealth restored on his watch.
Democrats have been staunch supporters of Bernanke, even though he is a Republican originally appointed by former president George Bush. Obama tapped the one-time Princeton professor for a second four-year term in 2009, thanking him for his aggressive efforts to combat the deep 2007-09 recession and virulent financial crisis.
The Bernanke-led Fed cut overnight interest rates to near zero in late 2008 and launched an unconventional policy of buying longer-term government and mortgage-backed debt to drive other borrowing costs lower.
Many Republicans privately blame Bernanke for helping Obama get re-elected in 2012 and have been outspoken public critics of the aggressive policies he has championed.
Some Republicans repeated their complaints on Wednesday, but they also spent time warmly acknowledging his service, while noting this could be his last appearance before the House.
Indeed, the atmosphere in the crowded hearing room was a great deal lighter than during the dark days of the financial crisis when Bernanke had to endure a heavy barrage of critiques, and the Fed chief looked more at ease.
One lawmaker asked him if now would be a good time for a friend to refinance his mortgage. Bernanke cheerfully responded: "I am not a qualified financial adviser."
However, there were moments when he looked as if he might be relieved he would not have to endure long-winded congressional hearings for much longer, although he does address the Senate banking panel on Thursday.
His smile thinned when committee chairperson Jeb Hensarling, a Texas Republican, announced three hours into the hearing that Bernanke would have to sit through another 10 minutes of questioning.
And he slumped visibly, head on hand, as he listened to Michele Bachmann, a Republican from Minnesota, wonder aloud whether the US Treasury was cooking the books on the federal budget, before politely deflecting her question.
Likewise, his final words to the committee, in response to a question from New Mexico Republican Steve Pearce about whether there was a level of immigration into the United States that could hurt the economy, sounded unapologetically dismissive: "I don't know."