In a recent report – HSBC China Monetary Conditions Indicator – HSBC said the People’s Bank of China (PBoC) needs to introduce additional stimulus and reform.
“Monetary policy still has room to be loosened further given well-contained core inflation,” the report said.
“We continue to expect further easing measures, including another 150 [basis points] reserve ratio cut for the rest of 2015.”
As a result, HSBC said China is likely to achieve a moderate growth recovery towards year end, with GDP growth heading towards 7.1 per cent.
UBS Global Asset Management executive director and head of investment strategy Tracey McNaughton argued that China is likely to implement additional domestic stimulus.
“Certainly more domestic stimulus measures can be expected in the near-term and this will provide some support for the economy,” she said.
The stimulus will likely come from the fiscal side as the PBoC will attempt to avoid depreciating the renminbi’s FX rate further, according to Ms McNaughton.
HSBC pointed out that Chinese policymakers have "sufficient monetary and fiscal options and will not use the currency as a policy tool to support growth".
Moreover, Ms McNaughton noted that the US Federal Reserve will continue to monitor monthly economic developments in China.
“The increased focus on China by the Fed makes the timing of lift-off more uncertain and means an even greater focus will be placed on (sometimes questionable) Chinese monthly economic data.
“Unfortunately for investors, this therefore means volatility is here to stay a little longer,” she said.
