Monday, June 25, 2012

China’s stimulus measures kick in

l  Conflicting economic news have come out of China in recent weeks. Although China's inflation eased to 3 percent in May, other statistics, including industrial output, indicated a slowdown in the world's second largest economy appears imminent.

l  On the eve of Communist Party of China’s (CPC) 18th Congress and its once-in-a-decade power transition, these weak numbers cannot be good news for China’s outgoing leadership of Hu Jintao and Wen Jiabao.

l  The combination of falling inflation and sluggish industrial production will give Beijing more room to loosen monetary policy and implement stimulus measures.

l  We thus expect the People's Bank of China (PBC) to cut both the required reserve ratio and interest rates further in the second half of the year. PBC’s recent decision to lower China’s interest rate by 0.25% was, in fact, just the beginning.

l  More significantly these disappointing numbers have led to a deliberate change in China’s macroeconomic policy where more emphasis is now placed on growth and expansion.

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