Easier Chinese monetary policy expected: Goldman

Goldman Sachs said it expected China to adopt a slightly easier monetary stance in the face of titfor-tat tariffs between China and the US that, while likely to have limited immediate impact on the economy, were at risk of escalating.

On Friday, the Trump administration imposed tariffs on $50 billion of imports from China, a move that came on top of hefty duties on steel and aluminum imports implemented at the start of June. China retaliated swiftly by announcing reciprocal tariffs on US products, ranging from soybeans and vehicles to seafood.

Goldman Sachs analysts forecast that the negative growth impact on China of the tariffs would be 10 to 20 basis points of GDP, while the effects on Chinese CPI inflation would be “modest, on the order of 10-20 basis points.”

Goldman has forecast China’s GDP growth to be 6.6 percent this year. It also said it expected inflation to remain “mild” in the coming months after the May CPI number came in unchanged at 1.8 percent year-on-year.

“The tariffs announced thus far should have relatively small macro effects, but there is clearly a risk of further escalation,” its analysts wrote in a note late Sunday.

Goldman adjusted its forecasts for the reserve requirement ratio (RRR) in China and the rate on the country’s 7-day reverse repurchase agreements, the tool of choice for the central bank in managing interbank liquidity, reflecting “an expectation of slightly easier policy going forward,” they wrote.

The investment bank lowered its forecast for the 7-day repo rate to 2.75 percent from 3 percent at year-end, and it said it expected the People’s Bank of China, the central bank, to cut the RRR by 50 basis points per quarter for the rest of the year.

In April, the PBC unexpectedly cut the RRR by 100 basis points to 16 percent for large institutions and 14 percent for smaller banks.