China’s monetary conditions at 13-month high in October, HSBC says
Monetary gauge shows policy easing measures ‘being felt’
China’s monetary conditions strengthened in October to its highest level in 13 months, although further easing is likely needed to keep the economy out of deflation, according to HSBC.
The HSBC China Monetary Conditions Indicator (MCI), a gauge of monetary conditions in the Chinese economy, strengthened for a third month in a row in October to a 13-month high of 1.5, according to a report dated November 20 by the Sino-British banking group.
“This is the third consecutive month of improvement, implying that the impact of cumulative policy easing measures is being felt,” the report said.
The analysts forecast Beijing will launch more aggressive monetary polices in the coming year to counter deflationary risks, including interest rate cuts and a further reduction in the amount of funds banks are required to set aside as reserves.
In the past year , the People’s Bank of China has announced six reductions in key interest rates, while also slashing banks’ reserve requirement ratio four times, as the country’s economy looks likely to slip below 7 per cent this year for the first time in 25 years.
The October MCI indicated that China’s financial conditions are “comparable” to the levels seen in October 2014, analysts led by Qu Hongbin, chief economist for Greater China at HSBC, said in the report.
“This should support a modest pickup in activities over the next few months,” they added.
The yuan’s recent depreciation against the US dollar, following China’s reforms to the exchange rate fixing mechanism, has resulted in a smaller drag from the real effective exchange rate on the MCI.
In addition, real M2 money supply growth made a higher contribution to the MCI than in September, driven by an increase in money supply and a fall in inflation.
M2 growth rose to 13.5 per cent year-on-year in October, up from 13.1 per cent in September, marking the fastest pace of growth since July last year.
Nevertheless, the contribution from the real interest rate remained unchanged for the third consecutive month in October, as the impact of the rate cuts on October 23 was “offset” by falling inflation, analysts said.
China’s October consumer inflation was below market expectations at 1.3 per cent, easing from 1.6 per cent in September. The fall was driven mostly by cooling food inflation, although non-food inflation also eased, signalling weakness in core inflation.
HSBC debuted its China MCI earlier this year as a way of providing a more accurate gauge of monetary conditions. Money supply growth, as measured by M2, had become less reliable as an indicator as China allowed greater flexibility in its currency, and as other reforms in the economy were made, according to HSBC. The bank published its first MCI print in May, tracking April data.
Looking ahead, China’s economy still faces “considerable headwinds” from weak external demand, a slowdown in the industrial sector, and increasing deflation risks, HSBC said in the report.
Prolonged deflation will erode China’s growth potential and pose risks the economy, analysts said, even as the latest retail sales data indicates consumer spending remains robust.
HSBC forecast China will launch more easing measures to support growth. These include a 100 basis-point reduction in the reserve requirement ratio by year end. Next year will likely see a quarter-point policy rate cut and a 200 basis-point cuts in banks’ reserves requirement.