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Why China might turn on the stimulus tap again

Workers are seen at a textile factory in Huaibei, in east China's Anhui province, on Nov. 21, 2011. China's manufacturing activity slumped to its lowest level in 32 months in November, banking giant HSBC said, renewing fears the Asian powerhouse is losing steam amid global economic woes.

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In grim economic times, China's vice-premier, Wang Qishan, says an "unbalanced recovery" is preferable to a "balanced recession."

With news that China's manufacturing sector likely shrank in November at a rate not seen since March, 2009, there are now suggestions that the country may turn its attention from slowing inflation to economic stimulus, to avert a feared "hard landing" in slowing economic growth.

A flash PMI indicator for November, based on a survey conducted by HSBC Holdings and Markit Economics, sits at 48, down from last month's 51. Any number below 50 is considered contraction.

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That number is more worrying as it is not yet thought to reflect the full impact of Europe's sovereign debt crisis, which will affect demand for Chinese exports.

"The Chinese government always wants to do something very active in the physical areas. I would not be surprised if economic growth is slowing...if policy makers feel it is too low, that they would implement new policy in this area," said Prof. Lu Feng, an economist at Beijing University, who said policy makers are watching an "accumulation of signals" for the right moment to turn their focus from controlling inflation and an overheated property market toward stimulating growth.

He said such policies, if deemed necessary, would likely be delivered through the National Development and Reform Commission, which managed the 4 trillion yuan stimulus package issued in late 2008.

After Sino-U.S. trade talks Monday in Chengdu, where Mr. Wang issued his warning, U.S. Commerce Secretary John Bryson said Chinese officials had confirmed plans to spend $1.7-trillion on strategic sectors in the next five years. That number is thought to already be contained in the 12th Five-Year Plan, for developing alternative energy, biotechnology and advanced equipment manufacturing to help China diversify its export-driven economy.

Chinese policy makers have also already announced plans for tax reforms for small- and medium-sized enterprises and on bank lending, following a high-profile credit crisis in Wenzhou that has spread to other cities.

"Growth is set to overtake inflation as Beijing policy makers' top policy concern," wrote Qu Hongbin, HSBC's co-head of Asian economics research. "The key worry here is that the full impact of the global exports slowdown hits before the impact of Beijing's recent tightening measures has completely lifted from domestic manufacturing demand."

However neither economist is yet particularly worried about the prospect of a "hard landing," defined as GDP growth of less than 8 per cent. The World Bank this week also predicted China's GDP growth would stay at 9.1 per cent this year and 8.4 per cent next year, though it did not rule out a "strong" impact from a severe correction in the overheated real-estate market.

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"I think the slowing down of the economy is not a big issue," Prof. Lu said, since the government still has "many policy instruments available."

"Maybe the long-range growth rate of the economy is slowing down and the days of double digit growth are gone but I think China still has a considerable period to enjoy a very high growth rate, like 8 per cent, in coming years," he said.

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