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Analysis: Will Fed easing spur China's central bank into quick action?
September 13, 2012 / 1:16 AM / 5 years ago

Analysis: Will Fed easing spur China's central bank into quick action?

BEIJING (Reuters) - Expectations that the U.S. Federal Reserve will launch another round of bond buying this week are fueling speculation that China also may ease policy soon to shore up its cooling economy.

But analysts say investors who bet on quick action from the People's Bank of China could be disappointed, with only an outside chance that it would follow the Fed's lead with more monetary easing of its own any time soon.

The best markets could hope for would be a further cut in banks' reserve requirement (RRR), but the odds against such an imminent move or even an outright interest rate cut are high as a recent flare-up in property and consumer inflation overshadows the urgency of policy easing.

Moreover, unlike the 2008/09 global crisis, China's labor market is still holding up well in part due to wrenching economic and demographic shifts.

Markets simply may have underestimated Beijing's tolerance of lower economic growth this year, as long as the slowdown is not too abrupt and does not spark social unrest ahead of a once-in-a-generation leadership change expected next month.

The Chinese economy will slow further in the third quarter but regain some momentum late in the year as the impact of earlier policy easing fully kicks in, according to the latest Reuters poll of economists released on Wednesday.

Still, even if activity rebounds modestly in the fourth quarter, it would drag full-year economic growth to below 8 percent, a level never seen since 1999.

INFLATION IN FOCUS

The central bank needs to tread carefully amid signs that its earlier policy easing has fanned property price rises that have triggered public anxiety.

That's probably why the PBOC has so far defied expectations for more aggressive moves since its last interest rate cut in July. Instead, it is opting to use reverse repos to inject short-term money into the banking system.

Housing prices, rebounded on a monthly basis for the second straight months in July, following eight consecutive months of declines, while annual inflation accelerated to 2 percent in August from a 30-month low of 1.8 percent in July.

"The key dilemma for policymakers is that inflation looks like it will pick up earlier than expected, while a growth recovery coming later than expected," said Yiping Huang, chief economist for emerging Asia at Barclays Capital in Hong Kong.

"I think the central bank will probably do a little bit more (on easing), depending on how the economy is doing. Realistically, the economy is going to rebound but certainly not going to rebound significantly."

The PBOC may keep policy settings unchanged until the fourth quarter, when growth may stabilize or even recover due to the lagging impact of policy stimulus, according to government economist familiar with the policy-making process.

"We don't expect any major changes in macro-economic policy in the run up to the 18th Party Congress and the fundamental tone for monetary policy remains prudent," Wang Jun, senior economist at the China Centre for International Economic Exchanges (CCIEE), a Beijing-based think-tank, told Reuters.

"Policymakers have drawn a lesson from the past and don't want to stimulate economic growth aggressively," he said, referring to concerns that too much stimulus could re-ignite inflationary pressures.

The 18th Communist Party Congress, at which China's next top leaders are likely to be unveiled, is set for October.

Under the banner of policy 'fine-tuning", the central bank cut interest rates twice in June and July and lowered banks' reserve requirement ratio (RRR) three times since late 2011, freeing an estimated 1.2 trillion yuan for boosting loans.

"The chances of policy easing are slim in the near term, but we cannot rule out a cut in RRR or interest rates," said You Hongye, an economist at China Essence Securities in Beijing.

SURPRISE?

Predicting the timing of China's monetary policy moves can be a daunting task given the central bank does not hold regular policy meetings as its counterparts in the West, and it has a track record of surprising the market.

One, albeit slim possibility is that the China may opt to cut banks' reserve requirements or rates as part of a globally coordinated policy action to shore up the world economy, especially if the Federal Reserve launches a third round of quantitative easing, or QE3 after a two-day meeting ending on Thursday to spur the U.S. recovery.

China, the euro zone and Britain loosened monetary policy within less than an hour of each other in early July, signaling a growing level of alarm about the world economy. China's move was a surprise, though suggestions of any coordinated action were played down.

Unlike its counterparts in the West, the central bank still has plenty of room to cut borrowing costs. The benchmark one-year bank lending rate is at 6 percent while one-year deposit rate is at 3 percent, while the RRR level remains at 20 percent -- among the highest in the world.

Peng Wensheng, chief economist at CICC, still expects one or two cuts in RRR and another interest rates cut by year-end.

NO URGENCY

As long as the labor market holds up, economists say Beijing will not be overly concerned about a growth slowdown.

China launched a massive stimulus plan four years ago after at least 20 million Chinese lost their jobs in a matter of months as world trade ground to a halt.

But the labor market has proved to be more resilient this time round, with economists pointing to an expanding service sector, which is diversifying growth away from the vulnerable export sector and creating plenty of new jobs.

While expectations of central bank moves have been dialed back, investors' focus has shifted to prospects for more fiscal stimulus measures, which already are gaining pace.

Last week, the National Development and Reform Commission announced that it had approved over $150 billion worth of infrastructure projects, but analysts remain skeptical about any quick impact on economic growth as the projects still need time to get funding and start construction.

Premier Wen Jiabao said on Tuesday that Beijing was in fiscal surplus of about 1 trillion yuan ($157.9 billion) in the year to date and if needed the government could utilize a 100 billion yuan fiscal stability fund to boost growth.

Wen also said the economy remains on track to meet the government's annual 7.5 percent growth target.

China still created 8.1 million new jobs during the first seven months of 2012, up 5 percent from a year earlier, he added. The tally was 90 percent of the annual target of 9 million set by the government at the beginning of the year.

"They don't really have any urgency (in policy easing) at this point. They keep the power dry and they will respond if things get worse," said Tim Condon, head of Asia research at ING in Singapore.

"The economy is not doing great, but it's not doing that badly." ($1 = 6.3351 Chinese yuan)

(This story has been refiled to fix typo in paragraph 22)

Editing by Kim Coghill

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