Asia Economy

Is fresh China stimulus a done deal?

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While the Chinese government has indicated a greater tolerance for a slower growth, economists expect Beijing to turn on the stimulus taps to prop up the economy following a sharp deceleration in activity growth in August.

"I think the data was sufficiently weak to lead to significant steps. When? Such responses tend to be quite fast in Beijing. I would expect to see steps, or announcements of them, in the coming weeks," Louis Kuijs, chief China economist at RBS told CNBC.

Kuijs expects the government to boost infrastructure investment, relax property market policies and take more monetary easing steps.

"If downward pressures on growth persist in the coming months, we would expect a shift to a bolder approach, with more general and higher profile measures, including possibly a general cut in reserve requirement rates or lending interest rates," he said.

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China's activity growth registered a sharp deceleration in August, raising fresh fears of a hard landing in the economy. Industrial production growth slowed to 6.9 percent in August from a year earlier, its lowest level since the 2008 global financial crisis.

Overall investment momentum also slowed further. Nominal fixed asset investment growth fell to 13.8 percent on year in August from 15.7 percent in July, the lowest growth on record, according to RBS. Fixed asset investment in manufacturing, which makes up around one-third of total investment, was a major drag.

The data prompted RBS on Monday to downgrade its 2014 gross domestic product (GDP) growth outlook for China to 7.2 percent from 7.6 percent.

Ting Lu, chief China economist at Bank of America Merrill Lynch also expects Beijing to "significantly step up stimulus efforts."

Expect more RRR cuts from China: Pro
Expect more RRR cuts from China: Pro

"We especially expect measures to lower bank mortgage rates and ease mortgage lending standards for home buyers. We reckon the chance of a system-wide RRR (reserve requirement ratio) cut now is rapidly rising," he said.

So far, the People's Bank of China has only cut the RRR - or the amount of deposits that banks need to hold at the central bank - for banks with a high proportion of lending to the agricultural sector and small firms.

"Markets may react with a big disappointment initially, but hopes for stimulus, growth rebound and reforms in coming months will help limit the sell-off," he said.

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Bank of America Merrill Lynch on Monday revised down its third and fourth quarter growth forecasts to 7.2 percent and 7.3 percent, both from 7.4 percent, respectively. It expects full year growth of 7.3 percent.

The Chinese leadership has sought to soothe concerns associated with an accelerated slowdown in the economy.

At the World Economic Forum in Tianjin last week, Premier Li Keqiang said growth is on course to meet the "around" 7.5 percent growth target for 2014.

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Li said China's structural reforms are improving the quality of the country's economic growth and helping reduce the risk of a hard landing. He stressed the government's key focus remains on rebalancing the economy and job creation, not short-term fluctuations in economic indicators.