Monetary easing seen as Beijing's next move to spur slowing growth

Slowing growth may force central government to follow its mini stimulus with a cut in bank reserves, the first such move in two years

PUBLISHED : Tuesday, 08 April, 2014, 1:08am
UPDATED : Tuesday, 08 April, 2014, 1:08am

The mainland will probably need to ease monetary policy for the first time in two years in coming months to prevent the economy from losing too much momentum, according to economists who doubt the "mini stimulus" announced last week can do the job.

Beijing has fast-tracked spending on railways and other projects in poorer regions and also cut taxes for small businesses, in what looks like a repeat of the fine-tuning that helped tide the economy over a soft patch last year. This time, though, Beijing will also need monetary easing - such as the first cut to bank reserve ratios since May 2012 - and other steps to bring the economy back to desired cruising speed, economists say.

"The measures will do some help but probably not enough. We think there may be monetary easing," said Kevin Lai, senior economist at Daiwa Capital Markets in Hong Kong.

Xinhua dismissed in an English language commentary speculation about any stimulus package in the offing. "A 'mini stimulus' theory has been widely circulated after the State Council announced a set of policies on Wednesday," it wrote. "However, any talk about an incoming stimulus package is misleading and those anticipating the kind of stimulus China unleashed following the 2008 global financial crisis are likely to be disappointed."

Such commentaries are not official policy statements, but can be read as a reflection of government thinking.

China acted for the first time this year to steady its stumbling economy by cutting taxes for small firms last Wednesday and announcing plans to speed up the construction of railway lines.

Xinhua said that the economy needed "a little stimulation but not a fully fledged stimulus".

"There is no need to panic, not least because China's growth rates remain high compared with the recent sluggish standards of Western nations," it added. "The smart ones have got it. There is no sign of a monetary and fiscal policy shift."

Economists with top government think tanks say a cut in the amount of commercial banks' cash tied up in central bank reserves is probably part of the "policy reserves" that Premier Li Keqiang has mentioned to reassure nervous investors.

Those reserves also helped give the leadership the confidence it needed in December to keep its economic growth target for this year steady at 7.5 per cent, they say.

"When we set the 7.5 per cent target, we have taken such [mini stimulus] policies into consideration. We are just rushing them out now," said Zhu Baoliang, chief economist at the State Information Centre, a top government think tank.

Economists expect first-quarter gross domestic product figures to show growth slowing to 7.3 per cent, from 7.7 per cent in 2013.

That would be the slowest growth in five years and near the minimum needed to ensure stable employment.

There are plans to build 6,600 kilometres of new railway, 1,000km more than last year. This year's central government budget also set aside 457.6 billion yuan (HK$574.6 billion) for affordable housing, railways, energy saving, water conservation and agriculture - 20 billon yuan more than last year.