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 The People's Bank of China cut interest rates and lowered the amount
of reserves banks must hold for the second time in two months on
Tuesday, acting amid pressure from a global stock market rout and
massive outflows from its markets.
But with factory activity, exports and inflation slowing along with
prolonged producer price deflation, economists polled predicted that
the PBOC would have to act again.
The median from a snap survey of around 20 economists showed there
is a 80 percent chance of a further cut in the reserve requirement
ratio (RRR) by end-December, while the chance for a reduction in the
lending and deposit rates stood at 70 percent.
While prospects of further easing will calm investors who are
jittery over the effects a China slowdown could have on global
growth, some analysts fear Beijing's strategy might prove
inadequate.
"The drip-feed of stimulus might not be sufficient to arrest
aggressive bears, or significantly lift the economy in a
demand-constrained world," Mizuho Bank economists wrote in a note.
"While China's latest easing measures are certainly welcome, we are
worried that such reactive, ad hoc and uncoordinated (policy) might
undermine conviction and efficacy."
The interest rate cuts followed a shock devaluation in the yuan
earlier in August, a move policymakers said would aid financial
reforms, although many saw it as a deliberate attempt to lower the
currency and help exporters.
For now, stock markets in China and elsewhere seem to have
stabilized with Asian indices extending a global rally on Friday
after data showed U.S. economic growth surpassed expectations in the
second quarter.
That could give some impetus to the Federal Reserve to raise
interest rates for the first time in a decade, although expectations
it would do so in September have all but evaporated after the
financial market volatility in the past week.
The poll also showed China's key lending rate will probably be cut
to 4.35 percent by the end of the year, after which it is expected
to stay steady, and the deposit rate is expected to come down by 25
basis points to 1.50 percent by the year-end.
Economists expect the PBOC to lower the RRR further, with the median
consensus showing it will be cut to 17 percent from the current 18
percent by end-December and further lowered to 16 percent by the end
of next year.
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"There will be a need to inject liquidity in interbank market to
neutralize the impact from foreign exchange intervention," said
Flemming Jegbjærg Nielsen, analyst at Danske Bank.
Falling interest rates could increase capital outflows in China and
drag the yuan lower, meaning more PBOC intervention in currency
markets as policymakers have pledged to protect the yuan from sharp
falls.
While the increased liquidity from the reserve cuts will benefit big
banks, demand for credit from China's vast population and businesses
is tepid and remains a source of concern.
Asked what else the PBOC could do apart from cutting rates, some
respondents said it could lend directly to select banks, expand its
medium-term lending facility and take more steps to aid the real
economy.
Economists also said China's housing market, a major factor in
economic activity, is dangerously close to a steep correction and
targeted measures from Beijing would be needed along with policy
easing from the central bank to tackle the slowdown.
"We are expecting fiscal spending to be much stronger for the rest
of the year after the significant disruption in the first half,"
said Julian Evans Pritchard, China economist at Capital Economics.
"If Beijing wants to hit its spending target its going to have to
step up spending."
(Polling by Beijing Newsroom and Shaloo Shrivastava and Khushboo
Mittal in Bengaluru; Editing by Simon Cameron-Moore)
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