Pressure mounts on the Chinese economy, monetary policy likely to remain accommodative

The Chinese economy is expected to remain under pressure in the near term, given the global slowdown that is hammering on investor sentiments and consumer confidence. China’s economy is still under pressure, implying that the monetary policy will remain accommodative. On FX side, it seems that the central bank will stabilize the currency a little bit after a fast CNY depreciation in the second quarter, reports said.

China witnessed a growth of 6.7 percent y/y in the second quarter, remaining unchanged from Q1 and slightly higher than what market participants had expected. On a seasonally adjusted basis, the economy grew 1.8 percent q/q in Q2, up strongly from a revised growth of 1.2 percent in the previous quarter, illustrating an improving growth momentum due to policy easing and property rally. For the first half of 2016, China’s economy grew 6.7 percent y/y, within the growth target range at 6.5-7.0 percent.

Further, monetary policy has turned more supportive in June, as both new loans and aggregate financing surprised the market on the upside. New loans were CNY1380 billion CNY in June, up strongly from CNY985.5 billion in May. In the meantime, M2 growth remained unchanged at 11.8 percent y/y in June, higher than market expectation of 11.4 percent.

However, the fixed asset investment slowed significantly to 9.0 percent y/y on a year-to-date (YTD) basis, versus a 9.6 percent growth during January-May. Private investment dropped to a new record low at 2.8 percent y/y YTD, from the previous reading of 3.9 percent, reflecting the soft sentiment in the private sector.

"To bolster growth in order to achieve 6.5-7.0% growth target, further monetary policy easing is still on the table. Therefore, we maintain our forecast that the PBoC will cut the policy rates by 25bps in Q3 and lower the RRR by 100- 150bps in the second half of this year," Commerzbank said in a statement.

Meanwhile, a new Macro Prudential Assessment (MPA) framework has been introduced, with a focus to contain the property price gains in the first-tier cities. Under the MPA framework, the banks could be asked to lower the loan-to-value (LTV) ratio and raise the interest rates for mortgage loans. Moreover, the regulators could increase the capital charge on banks’ property financing, the report mentioned.