China ramps up spending to spur economy, central bank sees stable policy

[June 11, 2014]  BEIJING (Reuters) - China's central bank said on Wednesday it will keep monetary policy steady in 2014, even as the finance ministry said fiscal spending had surged nearly 25 percent in May from a year earlier, highlighting government efforts to energize the slowing economy.

Total fiscal spending in May rose to 1.3 trillion yuan ($208.75 billion), quickening sharply from a 9.6 percent rise in the first four months of the year.

The higher spending comes as the world's second-biggest economy got off to a soft start to the year, growing at its slowest pace in 18 months in the first quarter.

The economy has since shown some signs of stabilizing, but the recovery appears patchy and analysts do not rule out further stimulus measures, especially if the cooling property market starts to rapidly deteriorate.

Fiscal revenues rose 7.2 percent in May from the same month last year, slowing from a 9.2 percent rise in April. The ministry attributed the slower revenue growth in May to the slowdown in the economy and falling property transactions.

China's central bank has been describing its policy stance as "prudent" in recent years, even when it is clearly loosening or tightening the policy reins. At the moment, for instance, authorities are in a gentle easing mode to counter the cooldown in the world's second-biggest economy.

The People's Bank of China said the outlook for external demand was uncertain, capital flows were volatile, and financial risks were weighing on the economy.

The PBOC's pursuit of stable monetary policy contrasts strongly with the finance ministry's mini-stimulus, which saw total fiscal spending rise 24.6 percent to 1.3 trillion yuan ($208.75 billion) in May as it brought forward spending sharply, from growth of 9.6 percent in the first four months of the year.

Stimulus measures taken so far by Beijing include speeding up the construction of railway projects and public housing, as well as orders to local governments to fast-forward their fiscal spending to prime the economy for growth.

Central government spending rose 15.8 percent in May from a year earlier while local government expenditure soared 26.9 percent, the finance ministry said.

The PBOC said on Monday it will lower the reserve requirement ratio - the level of reserves banks must hold - for those banks that have sizeable loans to the farming sector and small and medium-sized firms. This is the second reduction following a cut in April aimed at rural banks.

To re-orient China's economy away from exports and investment and towards domestic consumption, China will also speed up interest rate liberalization this year and work on introducing deposit insurance.

Two separate programs that allow foreigners to invest in Chinese capital markets and Chinese investors to invest overseas will also be expanded.

The two schemes are known as qualified foreign institutional investor, or QFII, and qualified domestic institutional investor, or QDII, respectively.

Chinese leaders have ruled out any large stimulus as the country is still nursing the hangover from the 4 trillion yuan ($640 billion) stimulus implemented during the global crisis in 2008-09, which took local governments deep into debt.

Economic data for May released so far indicate the economy remains wobbly, with export growth picking up but imports unexpectedly falling.

Inflation picked up to a four-month high, easing concerns the country was slipping into a deflationary trend but remaining well below the government's comfort zone, giving Beijing ample room to step up policy support if necessary.

The yuan currency has also appeared to stabilize after a sharp slide earlier in the year, though traders are not sure if the PBOC is comfortable enough with the export recovery to allow the currency to start appreciating again.

(Reporting By China Economics Team; Editing by Eric Meijer & Kim Coghill)

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