China's cbank likely to ease pol­icy again by end-De­cem­ber

The Pak Banker - - COMPANIES/BOSS -

China's cen­tral bank is highly likely to ease mon­e­tary pol­icy again by the end of this year, ac­cord­ing to econ­o­mists sur­veyed by media, as it seeks to sup­port a rapidly cool­ing econ­omy and calm fi­nan­cial mar­kets. The Peo­ple's Bank of China cut in­ter­est rates and low­ered the amount of re­serves banks must hold for the sec­ond time in two months on Tues­day, act­ing amid pres­sure from a global stock mar­ket rout and mas­sive out­flows from its mar­kets.

But with fac­tory ac­tiv­ity, ex­ports and in­fla­tion slow­ing along with pro­longed pro­ducer price de­fla­tion, econ­o­mists polled pre­dicted that the PBOC would have to act again.

The me­dian from a snap sur­vey of around 20 econ­o­mists showed there is a 80 per­cent chance of a fur­ther cut in the re­serve re­quire­ment ra­tio (RRR) by end-De­cem­ber, while the chance for a re­duc­tion in the lend­ing and de­posit rates stood at 70 per­cent.

While prospects of fur­ther eas­ing will calm in­vestors who are jit­tery over the ef­fects a China slow­down could have on global growth, some an­a­lysts fear Bei­jing's strat­egy might prove in­ad­e­quate.

"The drip-feed of stim­u­lus might not be suf­fi­cient to ar­rest ag­gres­sive bears, or sig­nif­i­cantly lift the econ­omy in a de­mand-con­strained world," Mizuho Bank econ­o­mists wrote in a note.

"While China's latest eas­ing mea­sures are cer­tainly welcome, we are wor­ried that such re­ac­tive, ad hoc and un­co­or­di­nated (pol­icy) might un­der­mine con­vic­tion and ef­fi­cacy."

The in­ter­est rate cuts fol­lowed a shock de­val­u­a­tion in the yuan ear­lier in Au­gust, a move pol­i­cy­mak­ers said would aid fi­nan­cial re­forms, although many saw it as a de­lib­er­ate at­tempt to lower the cur­rency and help ex­porters.

For now, stock mar­kets in China and else­where seem to have sta­bi­lized with Asian in­dices ex­tend­ing a global rally on Fri­day af­ter data showed U.S. eco­nomic growth sur­passed ex­pec­ta­tions in the sec­ond quar­ter.

That could give some im­pe­tus to the Fed­eral Re­serve to raise in­ter­est rates for the first time in a decade, although ex­pec­ta­tions it would do so in Septem­ber have all but evap­o­rated af­ter the fi­nan­cial mar­ket volatil­ity in the past week.

The poll also showed China's key lend­ing rate will prob­a­bly be cut to 4.35 per­cent by the end of the year, af­ter which it is ex­pected to stay steady, and the de­posit rate is ex­pected to come down by 25 ba­sis points to 1.50 per­cent by the year-end.

Econ­o­mists ex­pect the PBOC to lower the RRR fur­ther, with the me­dian con­sen­sus show­ing it will be cut to 17 per­cent from the cur­rent 18 per­cent by end-De­cem­ber and fur­ther low­ered to 16 per­cent by the end of next year.

"There will be a need to in­ject liq­uid­ity in in­ter­bank mar­ket to neu­tral­ize the im­pact from for­eign ex­change in­ter­ven­tion," said Flem­ming Jeg­b­jærg Nielsen, an­a­lyst at Danske Bank.

Fall­ing in­ter­est rates could in­crease cap­i­tal out­flows in China and drag the yuan lower, mean­ing more PBOC in­ter­ven­tion in cur­rency mar­kets as pol­i­cy­mak­ers have pledged to pro­tect the yuan from sharp falls.

While the in­creased liq­uid­ity from the re­serve cuts will ben­e­fit big banks, de­mand for credit from China's vast pop­u­la­tion and busi­nesses is tepid and re­mains a source of con­cern.

Asked what else the PBOC could do apart from cut­ting rates, some re­spon­dents said it could lend di­rectly to se­lect banks, ex­pand its medium-term lend­ing fa­cil­ity and take more steps to aid the real econ­omy.

Econ­o­mists also said China's hous­ing mar­ket, a ma­jor fac­tor in eco­nomic ac­tiv­ity, is dan­ger­ously close to a steep cor­rec­tion and tar­geted mea­sures from Bei­jing would be needed along with pol­icy eas­ing from the cen­tral bank to tackle the slow­down.

"We are ex­pect­ing fis­cal spend­ing to be much stronger for the rest of the year af­ter the sig­nif­i­cant dis­rup­tion in the first half," said Ju­lian Evans Pritchard, China economist at Cap­i­tal Eco­nom­ics. "If Bei­jing wants to hit its spend­ing tar­get its go­ing to have to step up spend­ing."

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