China economists back more policy easing

China may need more monetary and fiscal easing to halt an economic slowdown in the wake of torrential rains and flooding, and authorities’ tough response to outbreaks of the highly-transmissible coronavirus Delta variant, economists say.

Nomura lowered its China GDP growth forecast on Wednesday to 5.1 per cent in the third quarter and 4.4 per cent in the fourth quarter, from 6.4 per cent and 5.3 per cent respectively.

It also cut its full-year growth projection to 8.2 per cent from 8.9 per cent, citing the impact of Beijing’s tough stance on Covid control due to the emergence of the coronavirus Delta variant in many major cities.

While calling China’s zero-tolerance approach to containing the virus “increasingly costly”, Lu Ting, chief economist at Nomura, said he expects Beijing to keep policy rates steady this year in favour of a mix of “targeted tightening” and universal easing.

“However, we believe these policy easing measures might be insufficient at reversing the growth downtrend,” he said.

Policy insiders and analysts told Reuters that China is poised to boost infrastructure spending, while the central bank may take modest easing steps.

In a note, Goldman Sachs economists said they expect easing to focus on fiscal stimulus and government bond issuance, as well as a reserve requirement ratio (RRR) cut in the fourth quarter.

Standard Chartered, ING, OCBC Bank and Pinpoint Asset Management have also recently suggested possible further RRR reductions after the central bank surprised markets in July with a broad cut.

“Two RRR cuts in 2021 would not contradict the prudent monetary policy stance, but would help to reduce corporate borrowing costs, prevent M2 and TSF (total social financing) growth from slowing further, and pre-empt GDP growth from slipping below 5 per cent year-on-year in Q4,” said Li Wei, senior China economist at Standard Chartered.

The results of a Reuters poll of 82 financial institutions this week echoed that view, with nearly a quarter of participants expecting an RRR cut in the next three months, and some forecasting cuts to the one-year loan prime rate (LPR) and medium-term lending facility (MLF) rate.