Mon­e­tary eas­ing seen by year end

Low lev­els of in­fla­tion leave room for poli­cies to en­sure suf­fi­cient liq­uid­ity

China Daily (Canada) - - CHINA - By CHEN JIA chen­jia1@chi­

China’s mod­est in­fla­tion and in­creas­ing cap­i­tal out­flows­may lead to fur­ther­mon­e­tary eas­ing at end of the year to en­sure suf­fi­cient liq­uid­ity, ob­servers spec­u­lated.

In the first 11 months of the year, the Con­sumer Price In­dex av­er­aged 1.4 per­cent, much lower than the gov­ern­ment’s ceil­ing of 3 per­cent, while de­fla­tion in the man­u­fac­tur­ing sec­tor ran at 5.1 per­cent, ac­cord­ing to theN­ational Bureau of Sta­tis­tics.

In Novem­ber, the CPI climbed to 1.5 per­cent year-onyear, up from 1.3 per­cent in Oc­to­ber, driven mainly by food prices, es­pe­cially pork and veg­etable prices.

Mean­while, the Pro­ducer Price In­dex de­clined at an an­nu­al­ized 5.9 per­cent in Novem­ber, the same rate as in Oc­to­ber.

The PPI has stayed in de­fla­tion­ary ter­ri­tory for 45 con­sec­u­tive months, and the cur­rent read­ing is the low­est rate over that pe­riod.

De­spite the slight hike in con­sumer in­fla­tion, a much big­ger threat to the econ­omy is the long-term con­trac­tion of fac­tory-gate prices, re­flect­ing over­ca­pac­ity and lower com­mod­ity prices amid weak de­mand, econ­o­mists said.

Liu Li­gang, chief econ­o­mist in China at the Aus­tralia and New Zealand Bank­ing Group, warned that “China has en­tered a de­fla­tion­ary pe­riod” and said de­fla­tion from the man­u­fac­tur­ing sec­tor will fur­ther af­fect the­con­sumer­sec­tor.

TheCPIin2016is likely to fall to around 1 per­cent, said Liu.

ZhuHaibin, chief econ­o­mist in China at JPMor­gan Chase, also said that PPI de­fla­tion will likely con­tinue next year, al­though the pace may grad­u­ally slow.


Mon­e­tary pol­icy will con­tinue to be ac­com­moda­tive, though ... the room for fur­ther rate cuts will be­come more lim­ited.”


will con- tinue to be ac­com­moda­tive, though af­ter the se­ries of eas­ings the room for fur­ther rate cuts will be­come more lim­ited,” said Zhu.

He ex­pected one cut in the bench­mark in­ter­est rate by 25 ba­sis points and four cuts of the re­serve re­quire­ment ra­tio of 50 ba­sis points each in 2016, co­or­di­nated with fis­cal pol­icy to pro­vide sup­port in tar­geted sec­tor­sandto sta­bi­lize growth.

Re­cent data from the cen­tral bank showed that the coun­try’s to­tal for­eign ex­change re­serves de­clined by $87 bil­lion in Novem­ber, the big­gest since the record drop of $93.9 bil­lion in Au­gust, con­tin­u­ing the cap­i­tal out­flow.

It in­creased the pos­si­bil­ity that theP­eo­ple’sBankofChina would cut the re­serve ra­tio by 50 ba­sis points as early as De­cem­ber to sup­ple­ment liq­uid­ity, ac­cord­ing to Liu.

Zhao Yang, chief econ­o­mist in China at No­mura Se­cu­ri­ties, also ex­pected a mod­er­ate fis­cal stim­u­lus next year, with the bud­get deficit ris­ing to 3 per­cent of GDP in 2016, up from 2.3per­cent this year, as the con­tained in­fla­tion­ary pres­sures leave room for pol­icy eas­ing.

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