China aims at a more flexible monetary policy in 2016

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 22, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Mumbai) - China's annual Central Economic Work Conference yesterday stressed on the need for China's prudent monetary policy to be more flexible. Investors hold a lot of interest for this conference as it enables them to gauge the government’s economic targets for the next fiscal.

    A statement released after the conference on state news agency Xinhua highlighted that China’s fiscal policy needs to be more forceful. Xinhua also reported that the conference required the government to raise the country's fiscal deficit ratio gradually as well as reduce its amount of stock in the housing industry.

    China’s economic growth to be ‘L-shaped’

    Economic growth had fallen below the 7 per cent range in the third quarter for the first time since the global financial crisis despite a slew of policy easing measures introduced by the central bank and the government. According to President Xi Jinping, China must keep annual average growth of no less than 6.5 per cent over the next five years to attain the set objective of doubling GDP and per capita income by 2020.

    In the near future both China's and the world's economic recoveries can be expected to be "L-shaped". This signifies that a sustained period of modest growth will be followed by a sharp slowdown.

    Why China needs to push forward the supply-side reform?

    Top leaders yesterday pledged to push forward "supply-side reform". China needs to develop new growth engines and at the same time combat factory overcapacity as well as property inventories. Thus arises the necessity to initiate a supply side reform. Zhao, an analyst at Nomura explains "Supply-side reform means to increase the efficiency of major sectors, or the combination of allocation of sectors like labor and capital”. He however did not seem confident about the effectiveness of such a reform in boosting economic growth in the short term.

    To support a slowing economy China will likely expand its budget deficit in 2016 along with making its monetary policy more flexible. The government will initiate further measure to increase demand and simultaneously keep pushing supply side reforms. Tax cuts were also discussed at the conference.

    Will 2016 witness more easing by the PBoC?

    China will likely keep its economic policies accommodative in 2016. The state radio mentioned that the government’s objective is to keep economic growth within a "reasonable range"

    So far the PBoC has been successful in maintaining a prudent monetary policy. The fiscal policy can be best described as pro-active given that the central bank has slashed or raised interest rates depending on the economy’s overall health.

    The PBOC has cut interest rates six times since November last year and reduced banks' reserve requirement ratios (RRR).The government has also stepped up spending on infrastructure projects and eased restrictions on home buying to boost the sluggish property market.

    Markets believe there is more easing in the pipeline. Echoing market sentiments, Yang Zhao, Chief China Economist at Nomura expect “may be four RRR cuts and two more benchmark rate cuts in 2016”.
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