More Easing 'In the Pipeline'

CICC says interest rate cut likely as country's GDP growth slows down

Beijing is expected to make more policy-easing moves in the short term as economic growth is forecast to fall below 8 percent in the second quarter, economists said.

Peng Wensheng, chief economist of China International Capital Corp, said at a news conference in Hong Kong on Monday that it expects the mainland's economic growth to slow to 7.3 percent in this quarter, down from 8.1 percent in the first quarter of the year, as recently released economic data shows growth momentum remains weak.

Peng said that CICC has lowered its forecast for the mainland's GDP growth rate to 7.8 percent, from the 8.1 percent it expected earlier, which is the second time this year that the company has cut its GDP growth forecast. Originally, it predicted the mainland economy would grow by 8.4 percent this year.

Along with moderate economic growth, CICC also cut its CPI growth forecast to 2.8 percent this year, down from its earlier prediction of 3.3 percent.

"We believe that inflation could slow down to around 2 percent in July and August," said Huang Haizhou, CICC's chief strategist. He said tamed inflation will provide more room for the central government to ease its monetary policy.

"It is very likely that Beijing will cut interest rates again in August," said Huang, adding that the move will be accompanied by another reduction in the reserve requirement ratio.

Jing Ulrich, chairwoman of global markets with JP Morgan in China, said her company holds a similar view on the mainland's economic growth.

"This year, Beijing has set a GDP growth target of 7.5 percent, and the actual GDP growth rate will be quite close to the target," said Ulrich.

"JP Morgan is forecasting GDP growth of 7.7 percent this year."

Ulrich said she believes that policy easing is under way, but she does not expect any large stimulus like that in 2009.

Despite a desire to support growth, Beijing is averse to implementing sweeping expansionary policies that could lead to higher inflation, asset price increases and a surge in lending to non-priority projects.

She forecast that the People's Bank of China will cut the interest rate by 25 basis points and the RRR by 50 basis points in the third quarter of this year to improve liquidity.

But Ulrich pointed out that, unlike last year's sharp decline in bank lendings which reflected the government's strict controls on credit supply, the weaker-than-expected pace of loan growth in recent months can be partly attributed to softer demand for credit arising from uncertainties in the external environment and a deceleration in domestic growth.

Chris Leung, senior economist at DBS Bank (China) Ltd, said at a news conference that although mainland economic growth is slowing down, Beijing is not expected to ease its monetary policy on a scale expected by many.

Even with a moderate CPI, policymakers are still reluctant to ease monetary policy aggressively as they cannot afford to see asset prices rebound after all of the measures they have taken to cool down the property market, Leung said.

Leung said he believes that the latest interest rate cut should be seen as a big step forward toward interest rate liberalization rather than boosting the economy, as banks were given additional flexibility to set competitive lending and deposit rates.

He said the upcoming policy easing will target specific areas, such as energy conservation, environmental protection and projects that can help improve rural infrastructure.

Louise Liu, deputy director of China Forecasting Service of the Economist Intelligence Unit, disagreed with the forecasts.

She said on Monday that the mainland economy will record robust growth of 9 percent in the fourth quarter, benefiting from rebounding exports, domestic consumption and infrastructure spending in the second half of this year.

She added that instead of further interest rate cuts, Beijing may have to hike the interest rate once in the second half, as inflation is likely to rebound after economic growth accelerates.