Experts: Increased monetary easing likely

A woman shows banknotes and coins included in the 2019 edition of the fifth series of the renminbi. (Photo/Xinhua)

China might take more monetary easing measures in the first quarter, as the economy needs more support while the United States Federal Reserve accelerates its steps of tightening, experts said on Sunday.

"Further reductions in the reserve requirement ratio and interest rates are both possible in the first quarter of 2022," said Wang Qian, Asia-Pacific chief economist at the US-based Vanguard Investment Strategy Group.

China's economic growth may remain lackluster in the first quarter due to COVID-19 resurgences and slowing export growth, which points to the necessity of policy easing, she said, adding that easing measures will also be feasible at the beginning of the year, since the US Fed has yet to raise interest rates.

The remarks came amid market anticipations of a growing divergence in monetary policy of the world's two biggest economies. While easing measures could be on the horizon in China, the Fed signaled in a document on Wednesday that it could raise interest rates sooner than expected to tame inflation.

The rate increases, once implemented, might prompt some capital flow from China to the United States for rising asset yields and limit the room for China to roll out easing policies, as they could intensify the pressure of capital outflow and yuan depreciation, experts said.

Zhu Haibin, JPMorgan's chief China economist, said the window for China to cut interest rates may gradually close after April, as the Fed may start rate hikes as early as March, while headwinds facing the Chinese economy may abate starting in the second quarter.

"We now estimate there is close to a 50 percent chance that the People's Bank of China, the central bank, will cut the interest rate of the medium-term lending facility, a key policy rate, in March or April," he said.

Zhu added that the reduction, if implemented, might be marginal at 5 to 10 basis points, given the PBOC's overall prudent policy stance.

Zhang Bin, a senior researcher at the Chinese Academy of Social Sciences, a top think tank, said that reducing policy interest rates as soon as possible would help expand market demand, stabilize employment and ensure reasonable economic growth.

The Chinese leadership has hinted that macro policy will turn more supportive in 2022. Han Wenxiu, an official with the Central Committee for Financial and Economic Affairs, wrote in an article published by Outlook Weekly on Tuesday that maintaining macroeconomic stability is "not only an economic issue but a political one as well".

The PBOC implemented a reserve requirement ratio cut in December, reducing the proportion of money that lenders must hold as reserves rather than lending out or investing. Also last month, the one-year loan prime rate, the benchmark lending rate, decreased to 3.80 percent from 3.85 percent.

Experts added that despite the expected softening of the yuan against the US dollar, Chinese financial assets can largely hold their appeal to global investors this year, thanks to attractive valuation levels, long-term return prospects and diversification benefits.

Alexandre Tavazzi, global strategist at Pictet Wealth Management, said that investing in Chinese sovereign bonds can provide a "natural diversification effect", as interest rates in China are expected to move more independently from many other markets in the coming months.