China Seen Further Easing Monetary Policy as Growth Grinds Lower

  • Economists still see room for a RRR cut in 2015, survey shows
  • An extra benchmark lending rate cut is now forecast for 2016

China will add monetary stimulus next year, making good on a pledge to support growth as leaders push through policies to cut overcapacity and reliance on credit, according to economists surveyed by Bloomberg.

The People’s Bank of China will lower the benchmark one-year lending rate to 3.85 percent by the end of 2016 from today’s 4.35 percent, according to the median forecast of economists surveyed Dec. 17 to Dec. 22. Major banks’ reserve required ratio -- the proportion of deposits that must be locked away at the central bank -- will be 15 percent by the end of 2016, from 17.5 percent now, the survey showed.

The central bank, which in 2010 raised interest rates on Christmas Day, may keep traders busy in the final days of 2015, with economists still forecasting a RRR cut this year. Monetary policy must be more “flexible” and fiscal policy more “forceful” as leaders create “appropriate monetary conditions for structural reforms,” according to statements released at the end of the government’s Central Economic Work Conference on Monday.

"While the government can accept slower growth and allow destocking to continue, it will not be hands-free and aim to support the economy," Australia & New Zealand Banking Group Ltd. economists led by Liu Ligang wrote in a report. "Consistent with our prediction, China’s fiscal policy will be more proactive and monetary policy will remain accommodative."

Moderate Prosperity

The government’s annual growth target is typically set at the works conference as well, though isn’t announced. President Xi Jinping is aiming to maintain a minimum annual average growth pace of 6.5 percent through 2020 to meet his goal of bringing moderate prosperity to the nation.

To get there, he’s having to juggle structural reforms aimed at cutting overcapacity and boosting productivity with short-term stimulus to ensure the economy doesn’t stall. Economists forecast the budget deficit as a percentage of gross domestic product will widen to 2.7 percent next year and 3 percent in 2017, from 2.5 percent this year.

China’s government spending surged in November at more than double the pace of gains for revenue, a signal it has already stepped up stimulus. Fiscal spending jumped 25.9 percent from a year earlier to 1.61 trillion yuan ($249 billion), while revenue rose 11.4 percent to 1.11 trillion yuan, the Ministry of Finance said in a statement last week.

Economists in the survey forecast GDP growth will slide from 6.9 percent this year to 6.5 percent in 2016 and 6.3 percent in 2017. Consumer price inflation will quicken to 1.7 percent next year and 2 percent in 2017, from 1.5 percent in 2015, the survey showed, while producer prices are expected to keep declining for the next two years.

Economists see export trade dropping 2.9 percent this year then rising 1.4 percent next year and 2.6 percent in 2017.

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