Expectations of PBOC grow of further policy easing

Market expectations of the central bank adopting an easing policy are rising, after China's industrial output growth cooled in July, although the monetary authority has repeatedly confirmed its cautious stance since the third quarter, analysts said.

Many economists predicted that growth downside risks will rise, amid subdued global demand and the renewed escalation of US-China trade tensions, especially if policymakers do not step up policy easing.

The nation's money and credit data in July surprised the market, following gloomy industrial production data which also indicated weaker economic growth momentum at the beginning of the second half of this year.

The growth momentum of the world's second-largest economy moderated in July, after a pickup in June, according to a series of indicators released on Wednesday by the National Bureau of Statistics. It reported that industrial output fell markedly to 4.8 percent.

"The growth momentum has yet to gain a firmer footing while the slowdown in credit growth does not bode well for growth," said Louis Kuijs, head of Asia Economics at Oxford Economics.

"We expect further policy easing in the coming months to help stabilize growth amid the headwinds. However, it appears that the impact of the easing so far has remained muted," said Kuijs. "This is in part because policymakers retain an eye on macro leverage and financial risks."

Slower credit growth was in line with the country's softening economy last month. Total social financing, a measure preferred by analysts that reflects overall credit growth, grew 10.7 percent year-on-year in July, slower than 11.2 percent in June, according to data released by the People's Bank of China, the central bank.

These measures include all local government bond issuance and off-balance sheet forms of financing such as loans from trust companies. Bank lending growth fell further to 12.7 percent from 13.2 percent in the same period. Off-balance sheet lending dropped further and local government bonds issuance slowed.

New yuan-denominated loans fell to 1.06 trillion yuan ($150.06 billion) in July from 1.66 trillion in June, which was weaker than market expectations. While the growth pace of M2, a broad measure of money supply that covers cash in circulation and all deposits, also slowed to 8.1 percent, the lowest level since December 2018, according to the official data.

In terms of monetary policy, experts expected the central bank to continue adding liquidity to the banking system. Possible measures could be a combination of reserve requirement ratio cuts?a total of 1 percentage point for the rest of this year is likely, and lending facilities such as the medium-term lending facility (MLF), the targeted MLF(TMLF), re-lending and rediscounting.

There will be 383 billion yuan of medium-term lending facility loans due to mature on Thursday, and analysts expected the central bank to roll over the maturing debt and keep liquidity at an ample level.

A research note from Nomura Securities showed that liquidity conditions tightened modestly in July, as suggested by a rise in interbank interest rates. The monthly average of seven-day interbank repo rates for banks rose to 2.5 percent from 2.41 percent in June.

"Despite limited room for policy easing and the authorities' cautious policy stance, we believe the government will need to increase monetary and fiscal measures to stabilize financial markets and bolster growth because of strong growth headwinds," said Lu Ting, chief economist with Nomura Securities.