Asia Economy

Is China about to step on stimulus pedal again?

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As China's fragile economic recovery loses momentum, expectations are growing that Beijing will unleash fresh stimulus to ensure delivery on its growth target of 7.5 percent.

The last month has seen a slew of disappointing economic data – from manufacturing to credit growth – raising concerns that the world's second-largest economy may be headed into a renewed soft patch.

HSBC's preliminary reading of China's manufacturing purchasing managers' index (PMI) for the month of August dipped to 50.3 from July's 18-month high of 51.7, missing forecasts for 51.5.

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Meanwhile, lending unexpectedly slowed in July. A broad measure of new credit stood at 273.1 billion yuan ($44.3 billion) the lowest monthly total since October 2008.

Policymakers appear more nervous, particularly on the back of the weak credit growth, and will roll out more measures to bolster the economy, said Dariusz Kowalczyk, senior economist and strategist, Asia ex-Japan at Credit Agricole.

He expects a re-acceleration of fiscal spending, expansion of the pledged supplementary lending program and a relaxation of the window guidance for bank lending.

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Last Thursday, he raised his estimate on the likelihood of a system-wide reserve requirement ratio (RRR) cut in the second-half to 35 percent from 25 percent.

In June, the People's Bank of China cut the level of reserves banks must hold for certain banks that have sizable loans to the farming sector and small- and medium-sized firms.

"July will prove to be a bump on the road rather than the beginning of a serious downturn. Perhaps second half will be more difficult than first half was, but China will still achieve its growth target of 'about 7.5 percent'," he said.

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So far this year, the government has implemented targeted measures to support growth including accelerating spending on railways and other infrastructure projects and lowering tax rates for smaller companies, refraining from big-bang stimulus.

Jiang Chang, China economist at Barclays agrees more policy easing is unavoidable.

"The government faces a trade-off between 'tolerating lower growth' and 'rolling out more stimulus' amid a property market correction and uncertain external demand," Chang wrote in a note published on Thursday.

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"We believe the government also remains keen to achieve the 7.5 percent growth target, hence, we maintain our view that more policy easing is unavoidable and lowering medium-term interest rates/ financing costs in the economy is a top priority for the PBoC (People's Bank of China)," she said.

Chang expects more aggressive easing on the monetary policy front, forecasting two cuts in the benchmark lending rate in the second half to help ease debt burdens and support demand.

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The benchmark interest rate currently stands at 6 percent.

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Last week, Chen Dongqi, deputy chief at the Academy of Macroeconomics Research - which is affiliated to China's top economic planner, the National Development and Reform Commission – said China ought to loosen monetary policy further through modest cuts in bank lending rates and reserve requirements by next year to spur economic growth.

"The window has been opened for cutting interest rates and the reserve requirement ratio," he told Reuters.