China Economic Comment – September 2013

There has been a large divergence in views over the future path of China’s monetary policy/stimulus over the medium term. While the majority view expects target interest rates and reserve requirements to remain unchanged until early 2015, there are still analysts calling for cuts to rates.

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There has been a large divergence in views over the future path of China’s monetary policy/stimulus over the medium term. While the majority view expects target interest rates and reserve requirements to remain unchanged until early 2015, there are still analysts calling for cuts to rates and reserve requirements in the short term to ensure adequate liquidity and reasonable growth in the economy this year and next. The divergence in views is understandable given the confusion over the true stance on policy in China at the moment as government officials give mixed messages on the policy outlook, the state of the economy, and the government’s near term policy objectives.

Overall, monetary conditions appear to have tightened since the start of the year. While it is difficult to gauge the likely impact of monetary tightening on the economy as a whole, our own modelling suggests that a temporary 150 bps shock to interest rates (broadly consistent with the rise we have already seen across the yield curve), would detract around 0.3ppts from annualised GDP growth over the forecast horizon. Naturally, the negative impact on the economy depends on how long monetary conditions remain tight – our modelling for this exercise assumes it is only maintained for one quarter. This certainly highlights the difficulty of rebalancing, maintaining growth and limiting inflation all at once and probably explains the leadership’s current policy mix.

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