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Despite China's Inflation Warnings, Analysts See Further Easing

China's central bank warned on Wednesday that the country still needs to be on inflation watch, but analysts say, further monetary easing is on the cards, which could boost equity markets this year.

Jin Mao Tower and the Shanghai World Financial Center, in Shanghai.
Kohls Kohls|F1online RM|Getty Images
Jin Mao Tower and the Shanghai World Financial Center, in Shanghai.

China’s central bank in its fourth quarter monetary policy report said that a rebound in inflation should be prevented. But according to HSBC, the fact that the central bank increased its target for money supply growth to 14 percent this year from 13.1 percent in 2011 is a signal of further easing.

"While continued concerns about a potential rebound in inflation has slowed China's pace of policy easing so far, the new targets still imply more monetary easing to come," HSBC's economists said in a report published Thursday.

HSBC expects the People's Bank of China (PBOC) to cut bank reserve requirement ratios by 150 basis points in the first half of this year.

Stocks to Benefit

Expectations of monetary easing have already helped mainland stocks rally seven percent this year, while Hong Kong stocks have risen 15 percent over the same period.

Alistair Fullerton, Head of Institutional Sales at brokerage IND-X Securities, told CNBC, he expects the rally in Hong Kong stocks to continue and he's especially bullish on the banking and housing sectors.

Michael Kurtz, Chief Asia Equity Strategist at Nomura, says despite the rebound in Chinese stocks there is still "deep value" in some of the cyclical stocks, which experienced declines last year.

"The name of the game here really is that China is now pretty unambiguously shifting in the direction of monetary policy, that's designed to support growth, rather than to fight inflation. This sets China up for a pretty smart rebound in terms of demand in the second-half of the year and equities should continue to rally in the weeks ahead,” he said.