PBOC easing seen by economists to cushion growth slowdown

[SYDNEY] China's leaders will switch to stimulus mode to support an economy that expanded at the weakest pace since 2009 last quarter, economists said.

The central bank will inject more cash into banks, cut the amount of reserves lenders must keep, reduce interest rates, and steer money market levels lower, according to banks including Macquarie Group, HSBC Holdings, and Nomura Holdings Inc. The government is also expected to loosen fiscal settings and expedite infrastructure spending plans.

The good news is Premier Li Keqiang and People's Bank of China Governor Zhou Xiaochuan have far more policy firepower than counterparts in Japan and Europe. The bad news: stimulus so far hasn't spurred a revival, as banks remain reluctant to lend and the outlook for external demand remains uncertain.

"Monetary easing must accelerate in the coming months to support the economy," said Shen Jianguang, chief Asia economist at Mizuho Securities Asia. in Hong Kong. "Interest rate and required reserve ratio cuts are necessary," on top of targeted easing via liquidity injections.

Mr Shen expects a RRR cut this month, "in view of the sense of urgency by the government." He also flagged increased investment as part of the new Silk Road initiative.

Gross domestic product rose 7 per cent in the three months through March from a year earlier, matching the median estimate of economists and the leadership's full-year expansion target. Data for the month of March showed industrial production was weaker than all 40 estimates in a Bloomberg News survey.

"They have many tools at their disposal and there is still ample room for further stimulus," said Arjen van Dijkhuizen, senior economist at ABN Amro Bank in Amsterdam. "Hence, we expect them to continue with moderate monetary easing and targeted stimulus."

Larry Hu at Macquarie forecasts faster infrastructure investment approvals as well as interest-rate and RRR cuts. Zhao Yang at Nomura expects 25 basis point interest-rate cuts and half percentage point RRR reductions in each of the remaining three quarters of the year, while UBS Group AG's Wang Tao sees accelerated construction of key rail, water and energy projects, along with more monetary easing.

The premier last month said policy makers will step in to support the economy if jobs and wages are hurt by the slowdown, while PBOC Governor Zhou said the nation needs to be vigilant about deflation risks and policy makers have "room to act." Without further policy easing, real rates will continue to rise, said Qu Hongbin at HSBC in Hong Kong.

"Sequential growth needs to pick up more strongly in the rest of the year," Mr Qu said. "Underlying growth momentum, partly reflected in the March data, is likely already at, if not slightly below policy makers' bottom line."

On the fiscal front, policy will be expansionary this year, "in part to flank the implementation of the new local government debt framework, which puts downward pressure on local government borrowing," said Louis Kuijs, Royal Bank of Scotland Group's chief Greater China economist in Hong Kong.

One hurdle that may curb the extent of any monetary stimulus is China's surging stock market, which took off after the central bank cut interest rates for the first time in two years in November. Another may be reticence to reignite debt risks and a repeat of the 2009 stimulus binge.

Still, tame inflation, a slump in exports and the weakest industrial output growth since November 2008 last month are set to prompt Mr Li and Mr Zhou to act.

"Across-the-board weakening in March activity data suggested downside growth risks still loom large," said Helen Qiao, chief greater China economist at Morgan Stanley. "To prevent further deceleration and labor market instability with a time lag, we expect the policy makers to strengthen the efforts of coordinated policy easing with escalation in coverage and reinforcement in implementation."

BLOOMBERG