More policy support to bolster growth expected

China is likely to gradually introduce new policies to bolster quality-oriented growth in the near term, as the latest indicators suggest the economy is still feeling the pinch of lackluster demand and low confidence among investors and consumers, analysts said.

Existing policies are expected to be implemented in the following months along with additional steps to address the pressing challenges facing the broader economy, they said, adding that the central government has the fiscal capacity to leverage effective investment and spur consumption, and plenty of room to step up support for monetary policy.

The potential moves should include expanding this year's deficit ratio, further cuts in the reserve requirement ratio and interest rates, and reducing rates on outstanding mortgages, they said.

Their comments came after figures released by the National Bureau of Statistics on Saturday showed slower growth in industrial production, consumer spending and investment.

China's value-added industrial output grew by 4.5 percent in August from last year, with retail sales up 2.1 percent. However, these figures were down on the previous month where value-added industrial output and retail sales were up 5.1 percent and 2.7 percent in July.

The numbers have resulted in more calls for greater policy support to consolidate the country's economic recovery.

Darius Tang, associate director of corporates at ratings agency Fitch Bohua, said the latest figures reflect the structural imbalance embedded in China's economy with stronger supply and weaker demand.

"We believe that at the crux of the current weak consumption in China lies insufficient demand and people's unchanged low willingness to spend," Tang said.

"This is on one hand due to the fading growth of residents' disposable income, which raises concerns about employment and income stability. While on the other hand the decline in housing prices and the flagging stock market are triggering negative wealth effects and squeezing out the expenditure potential."

From January to August, fixed-asset investments rose by 3.4 percent from last year, while from January to July, they grew by 3.6 percent year-on-year. Property investment fell by 10.2 percent in the first eight months from a year earlier, the same as in the first seven months.

Tang said his team believes that "it is highly likely the Chinese government will introduce more stimulus policies on consumption and the real estate sector step by step in the fourth quarter", in a bid to spur people's willingness to spend and increase effective demand.

Considering the recent weaker-than-expected economic indicators, Xiong Yuan, chief economist at Guosheng Securities, said China's third-quarter GDP growth rate would probably be lower than that of the 4.7 percent in the second quarter, shoring up the case for stepped-up policy support to bolster growth.

"Policymakers will likely introduce new incremental policies in the near term," Xiong said.

"Potential moves will include expanding this year's deficit ratio, further cuts in the reserve requirement ratio and interest rates, and reducing rates on outstanding mortgages."

Looking ahead, Zhou Maohua, a researcher at China Everbright Bank, said China still has plenty of room to step up macroeconomic support this year, saying policymakers will likely further strengthen counter-cyclical and cross-cyclical adjustments.

Citing a key meeting held by the Political Bureau of the Communist Party of China Central Committee in late July, Betty Wang, lead economist at British think tank Oxford Economics, said it sent a clear signal of plans to strengthen the counter-cyclical adjustment in the second half of this year via multiple policy tools.

Wang said her team expects the People's Bank of China, the country's central bank, will cut interest rates by another 10 basis points in interest rates in the fourth quarter, along with an additional 25 basis points in the RRR during the period.

"We also expect the issuance of special local government bonds will pick up for the rest of this year with an average monthly issuance of 425 billion yuan ($60 billion), or 68 percent higher than that of the first seven months of this year," Wang said.