China's decelerating GDP growth in Q2 raises hopes of monetary policy easing
Decelerating GDP growth in Q2 raises hopes of monetary policy easing
Published: Jul 15, 2019 07:28 PM

Photo: Xinhua

Statistics released on Monday showed that China's economy posted its lowest quarterly growth in nearly three decades, stoking expectations of monetary policy easing in the near future.

The Chinese economy expanded 6.2 percent year-on-year in the second quarter, down from the first quarter's 6.4 percent and the weakest in 27 years, official data showed.

Although many major indicators for the second quarter including industrial output, retail sales and fixed-asset investment beat market forecasts, hopes for monetary easing were stirred by the combination of lackluster domestic growth and a strengthening case for rate cuts by the US Federal Reserve.

During testimony before the House Financial Services Committee on Wednesday, Federal Reserve Chairman Jerome Powell said the Fed will "act as appropriate" as "crosscurrents" weigh on the US economy. His testimony is seen as setting the stage for a rate cut as soon as the end of this month.

Stressing that Monday's data clearly reflects that China isn't headed for a hard landing, Hussein Sayed, chief market strategist at Cyprus-based forex broker FXTM, said in a research note sent to the Global Times on Monday that "Chinese policymakers will likely defend the 6 percent growth levels over the second half of 2019 by escalating stimulus measures, whether it's in the shape of fiscal or monetary" measures.

With the Fed highly likely to kick off a rate-cutting cycle and China's domestic inflation pressure possibly trending downward, Beijing would have more leeway to fine-tune its monetary policy, read a research report co-authored by Cheng Shi, chief economist at ICBC International, and Qian Zhijun, a senior economist at ICBC International.

Monetary policy will likely shift its focus to structural adjustments from an aggregate stance in the third quarter, the report said. That suggests that there will be targeted cuts in reserve requirement ratios, targeted support for small and medium-sized financial institutions to shore up capital, and liquidity injections into the market via structural tools such as the targeted medium-term lending facility, according to the report sent to the Global Times on Monday.

Additionally, if the Fed opts to cut rates in the third quarter, China's central bank is likely to lower rates for open market operations or the medium-term lending facility (MLF), but there's little chance of China cutting benchmark interest rates for deposits and loans, the ICBC economists wrote.

The People's Bank of China, the central bank, said in a statement on Monday that it loaned 200 billion yuan ($29.09 billion) to financial institutions via its one-year MLF. The interest rate was unchanged at 3.3 percent.