17th November 2011
For some time, China's growth has supported the global economy, but Europe is its largest trading partner and if – as many are predicting – Europe slides into recession Chinese growth may be under threat too. Equally, the inflation threat has started to subside leaving policymakers more scope to lower rates.
The prospect of some easing of monetary policy has already started to create a buzz after the People's Bank of China said in a statement on Wednesday that it would "at an appropriate time and in moderate degree pre-emptively adjust and fine-tune" monetary policy. The Central Bank added that it would do so based on changes in the global economy, but ruled out the prospect of higher interest rates for the time being.
The last few months have seen a notable shift in the inflation outlook: "Home sales fell and industrial output grew at the slowest pace in a year, adding pressure for measures to support growth in the world's second-biggest economy."
The same article quotes Chang Jian, an economist at Barclays Capital in Hong Kong, who says that tentative monetary easing is already underway, citing government support for small businesses and low-cost housing projects. He believes that more "aggressive" loosening would depend on further declines in inflation and growth.
"On the evidence of October's loan data, an easier monetary stance, with the banks pushing a few more loans out the door, is already underway. But with continued concerns about inflation, a more substantial shift toward stimulus is not on the agenda."
Caroline Maurer, co-fund manager, Henderson Horizon China fund agrees that monetary policy is likely to continue to become more accommodative: "For instance, policies to support small and medium-sized enterprises (SME) sectors have improved investors' sentiment towards China lately. Furthermore, China's fiscal strength (China fiscal revenue was up 28% year to date) puts them in good stead to support economic growth thorough social housing and subsidies on selected consumer goods and services, among other initiatives, if the global slowdown becomes more apparent."
Virginie Maisonneuve, manager of the Schroder International Alpha fund, believes that investors are still taking the threat of a Chinese slowdown too lightly: "The tap was turned off after the stimulus policies of 2009. In doing so, small and medium sized business have struggled to gain access to credit. Property sales may have fallen, but prices have remained high.
"The situation in Europe poses a big question for Chinese policymakers. A recession in Europe could have a large impact. They will want to judge this impact before making any significant moves on monetary policy."
Either way, it appears that the cycle of raising interest in China is definitely over, barring any significant resurgence in world growth. "A recent report by the state-owned investment bank China International Capital Corp. said policy makers have indeed turned attention toward loosening monetary policy, although the report also stressed that these changes would likely be gradual."
Investors are unlikely to see any sudden moves from Chinese policymakers and much depends on the outcome of the situation in Europe, but the Chinese economy has entered a new phase.
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