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More Help Is at Hand for China’s Slowing Economy

Dhara Ranasinghe |Senior Writer, CNBC Asia-Pacific
Monday, 6 Aug 2012 | 3:42 AM ET

The Chinese economy is likely to find support from a more active central bank together with a boost in spending by Beijing in the second half of the year - that’s the key takeaway from recent pledges made by the People’s Bank of China (PBOC) and policymakers to push growth, economists tell CNBC.

Beijing's Central Business District
Frederic J Brown | AFP | Getty Images
Beijing's Central Business District

The central bank said on Sunday that it would fine tune monetary policy and improve its credit policy. These comments came a few days after Beijing promised to increase efforts to make sure polices were more targeted, effective and pre-emptive to deal with a slowdown in the economy.

“There are two things out of those comments, one is that we will see more easing,” Rob Subbaraman, Chief Asia Economist at Nomura told CNBC Asia’s “Squawk Box”on Monday.

The second implication from the central bank’s latest comments, says Subbaraman, is that it’s taking measures that would make the implementation of its monetary policy more "effective.”

China’s central bank said it would widen the use of its yuan currency in cross-border trade and investment. It also reiterated that it would slowly move ahead with capital-account convertibility for the Chinese yuan.

“China is moving towards financial liberalization. I think they are moving towards a more market-based monetary policy,” said Subbaraman. “And that is very, very important because you can ease monetary policy but unless your policy is effective it’s not much use, so that’s what’s needed for China.”

In addition to monetary easing, since late last year, the Chinese government has also chipped in by fast-tracking investment projects and cutting taxes for businesses to boost a flagging economy.

“The (latest) comments underscore the message that China’s leadership is focused on growth and will ensure that there is support for the domestic economy to help it find its feet again,” said Donna Kwok, Greater China Economist at HSBC in Hong Kong, adding that she expects one more interest rate cut from China in the current quarter.

China’s central bank cut its benchmark interest rates in early July, the second rate reduction in two months. Before that China had not cut interest rates since 2008.

Besides monetary easing, fiscal stimulus is also on the cards. “More important is that there is likely to be an acceleration of fiscal spending,” Kwok said.

China’s Premier Wen Jiabao said last week China would increase fiscal and monetary support to the economy in the second-half of the year.

Good News for Commodity Bulls

Any measures to bolster the Chinese economy should boost commodity prices, which have taken a hit from the economic slowdown. China, the world’s second largest economy, has been a key driver of commodity prices in recent years.

“I do expect we will get a very good monetary and fiscal boost from China, which will be very good for commodity prices,” Warren Gilman, Chairman and CEO of CEF Holdings told CNBC Asia’s “Cash Flow,” adding that this would be positive for commodities such as iron ore although a couple more months of pain may endure first.

“We will get more (policy) measures, the question is when. I think it’s probably a little premature to be hoping it will eventuate in the next couple of weeks; we’re probably looking at new measures when the new administration takes charge in October or November,” Gilman said, referring to an expected change in China’s leadership later this year.

- By CNBC's Dhara Ranasinghe

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