China is headed toward another round of economic stimulus amid deteriorating economic results.
The latest gloom is an HSBC flash purchasing managers index that showed manufacturing falling for the seventh month running, down to 48.7. That added to April results showing economic growth down to 8.1 per cent, industrial production at its lowest level of growth since May, 2009, exports up a modest 4.9 per cent and imports up only 0.3 per cent year on year.
The tone of China's leaders is now changing from continuing anxiety over inflation and the property market to concern over maintaining growth.
"We must proactively take policies and measures to expand demand and to create a favourable policy environment for stable and relatively fast economic growth," the Chinese government said on its website Wednesday, following a State Council meeting.
It was the second such statement in a week suggesting further, modest stimulus is on the way, after Premier Wen Jiabao's earlier calls for giving "more priority to maintaining growth."
There have already been some moves to boost private investment, into areas such as rail, health care and energy, which are state-dominated, as well as fast-tracking private investment into infrastructure. Last week, the State Council also announced a new, one-year subsidy program worth 26.5 billion yuan ($4.2-billion U.S.) to encourage purchases of energy-efficient appliances, a tactic also rolled out in 2008 to boost domestic consumption and support traditional export industries.
The People's Bank of China last week also lowered the reserve requirement ratios of banks by 50 basis points, the third cut since November.
"We believe that GDP growth dropped to 7.1 per cent year-over-year last month," Mark Williams and Qinwei Wang at Capital Economics said in a research note.
"We are however optimistic that recent policy moves, from monetary easing to the speeding up of approvals for infrastructure projects, will start to revive the economy in the next few months," they added. "We expect stronger PMI readings in June and July."
If the tide is turning toward stimulus, the question now is what is left in the Chinese tool kit.
Complicating matters is that one of the dampeners on the Chinese economy has been the government's own doing: Tough restrictions on property ownership, which have successfully kept prices from rising and even brought them down in many cities, but which have also cut into GDP growth.
The World Bank this week urged the government to loosen the restrictions, although policy makers have so far shown little interest in doing so.
"After the 2008 to 2010 fiscal and monetary stimulus, China still has room to do more. But the question is how effective are those things going to be, and if the government is still worried about the housing bubble, then the choices are rather limited," said Li Wei, an economics professor at Beijing's Cheung Kong School of Business.
Both monetary and fiscal policy options carry some risk. Increasing government's direct spending is not ideal in an atmosphere where state-run banks are facing their own debt problems and state-owned companies could require bailouts. But loosening the money supply would likely fuel inflation and the property market, and may not be effective in boosting investment when property developers and major companies are still facing their own cash crunch.
"It would reinforce the imbalances in the Chinese economy that they are trying to move away from," said Patrick Chovanec, an associate professor in Tsinghua University's School of Economics and Management.
"They've definitely shifted their focus right now towards trying to do something to reignite growth," Prof. Chovanec added. "I think people are going to find [the government]has fewer levers than they think, and those all come at a cost."
What may also come into question is the exchange rate of China's currency, the yuan. Amid previous criticism from the United States that the yuan was kept artificially low to support China's export industry, policy makers allowed the currency to gradually float more freely. But commentary in a state-backed newspaper suggests the yuan's strength may also become a target in shoring up GDP growth.
"The yuan is over-valued currently, which directly leads to a decline in exports," Lu Zhengwei, chief economist with Shanghai-based Industrial Bank, told the Global Times newspaper.