By Ed Zhang and Huang Ying
Call it Beijing's "Stimulus 2.0".
China is at an inflection point as its economic policy focus shifts to growth instead of inflation control.
This time, the method of boosting growth is different from the past. Instead of throwing money at the problem - up to 4 trillion yuan (US$791 billion) was spent after the global financial crisis broke out in late 2008 - China is aiming for a more managed, selective stimulus.
In the next couple of months, more changes are likely in the run-up to the leadership transition, scheduled for the third quarter. The changes so far have fallen into the following categories:
No top-down change can come without a signal from Beijing.
Premier Wen Jiabao, during an inspection trip to Central China's Hubei province from May 18 to 20, told local officials that judging from "the new situation and new problems", the central government now sees the need for a greater emphasis on maintaining the speed of growth.
Last July, inflation was at what was considered a dangerous level of 6.5 per cent. Even in January, inflation was 4.5 per cent, still very high. Policymakers' top priority in such circumstances would inevitably be inflation control.
In comparison with Wen's trip to Hubei in May, in his earlier local inspection trip last October, he promised only "appropriate fine-tuning" of macroeconomic policies.
One month later, the People's Bank of China cut commercial banks' reserve requirement ratio by 50 basis points, allowing for faster loan growth.
By mid-May, the central bank had lowered the RRR three times, most recently on May 12, and economists have forecast further cuts in the next few months.
Large financial institutions' RRR was lowered to 20 per cent, while that for smaller banks fell to 16.5 per cent.
Economists differ on how much RRR cuts help growth. That banks can lend more does not mean that they will do so, immediately or in the longer term.
Although the latest RRR cut made it possible for banks to lend another 400 billion to 500 billion yuan, there was little increase in new credit from the top four State-owned banks - Industrial and Commercial Bank of China Ltd, Agricultural Bank of China Ltd, Bank of China Ltd and China Construction Bank Corp - in the first 10 days of May.
In the subsequent 10 days, only a minimal increase in new loans was reported from those four banks.
Analysts have estimated that the consumer price index for May would be about 3.1 per cent.
In June, it could fall below 3 per cent, making the once seemingly impossible goal of keeping the CPI below 4 per cent this year look achievable.
Once the CPI falls below 3 per cent, analysts said, the central bank would deem it more appropriate to cut interest rates, which would give a more direct boost to GDP growth.
Investment bank China International Capital Corp has said a rate cut might come as early as June.
On May 16, at a State Council executive meeting chaired by Wen, the central government decided to offer 36.3 billion yuan over the next year to subsidize the purchase of energy-efficient products.
Of the total, 26.5 billion yuan will be targeted to home air-conditioners, flat screen televisions, refrigerators, washing machines and heaters.
Another 2.2 billion yuan will go to LEDs and other energy-efficient lighting, 6 billion yuan for automobiles with engine capacities of 1.6 liters or less, and 1.6 billion yuan for high-performance motors.
The subsidies, economists said, could generate as much as 450 billion yuan in domestic consumption.
That sounds like a lot.
But analysts said it's a drop in the bucket for a 50 trillion yuan economy - the size of China's GDP last year.