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The Case for Rate Cuts in Asia Just Got Stronger

Tuesday, 2 Jul 2013 | 3:44 AM ET
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Manufacturing surveys released across the world this week may have given investors in Europe and the U.S. reason to cheer, but in Asia they only point to weakness and cement the case for further monetary stimulus, economists said.

In China, for example, both the official and a private gauge of manufacturing activity came in weaker rattling investors. China's official Purchasing Manager's Index (PMI) slipped to 50.1 from 50.8 in May, while HSBC's final PMI reading fell to a nine-month low of 48.2.

Data on Monday also showed South Korea's manufacturing sector contracted for the first time in five months in June, as its economy continues to suffer the impacts of Japan's weakening currency. Taiwan also saw a slowdown in activity after its June PMI fell to 53.6 from 55.3, its third monthly decline. A reading below 50 indicates contraction.

(Read More: China: From Driver to Drag on Global Growth)

In contrast, manufacturing data out of the U.S. and Europe showed a marked improvement. Europe's PMI hit a 16-month high of 48.8 in June and the Institute for Supply Management (ISM) in the U.S. said its index of national factory activity in June rose to 50.9 from 49 in May.

Analysts told CNBC, the worrying decline in Asian manufacturing data could prompt central banks to start loosening policy.

"Asian central banks should be thinking of stimulating soon," said Tim Condon, head of research for Asia at ING Financial Markets, talking about the Asia PMI surveys.

"They've been unable to do it in the past few months due to the panic in the markets, but that's fading now," he added.

(Read More: Asia's Fight to Stem Fund Outflows Just Starting)

According to Vishnu Varathan, market economist at Mizuho Corporate Bank: "[In] Taiwan and South Korea there is definitely scope to cut interest rates and they are more likely to do so if exports continue to be subdued. Especially in South Korea, if the Japanese yen weakens further then this will strengthen the case to cut rates."

Why China Doesn't Need a Rate Cut
Zhu Haibin, Chief China Economist and Head of Greater China Economic Research at J.P. Morgan says monetary easing may not be effective to address the structural problems facing China's economy at this moment. PK Basu, MD & Head of Asia Research & Economics at Maybank Kim Eng joins in the conversation.

But China could prove to be the exception to the rule, added ING's Condon, who ruled out any stimulus measures from the world's second largest economy, despite many global economists turning more bearish on the country.

(Read More: Why China's Economy May Be Heading for a Crash)

"The last thing China needs is more stimulus, given it has spent the last two weeks reassuring people it won't do that. But in other places central banks may feel they have the latitude to do so," he said.

The Bank of Korea last cut its interest rate to 2.5 percent in May, but left rates unchanged in its June meeting. The export-focused economy has been struggling with the impacts of rapid declines in the yen, which has decreased its export competitiveness. President Park Geun-hye announced 5.3 trillion won ($4.7 billion) worth of spending in April designed to spur growth and ease the impact of the yen's decline.

(Read More: The Race to Cut Rates: Look What Japan Started)

Taiwan's central bank kept its interest rates on hold for eight consecutive months in its June meeting, while the government cut is growth forecast to 2.4 percent for 2013 earlier in May. Taiwan's export orientated economy is particularly exposed to a slowdown in China.

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