Asia’s largest economy is forecast to report third-quarter growth of 7.2 percent next week, the least since 2009, after data for September showed overall financing missed estimates and inflation eased to the slowest since 2010. While the central bank lowered the rate on 14-day repurchase agreements this week, a cut in the benchmark is the most direct way to shrink financing costs, the China Securities Journal said in a commentary yesterday. Credit Agricole CIB says there’s a 40 percent likelihood of a reduction.
“The chances are significant because you have a simultaneous growth slowdown and a decline in inflation, which opens the door for policy makers to address slower growth,” said Dariusz Kowalczyk, a strategist at Credit Agricole in Hong Kong. “Most lending is benchmarked off the PBOC’s rate rather than that of the market. It’s precisely because they’ve kept the benchmark lending rate steady that credit growth isn’t that strong.”
Many market participants have their attention trained on the Federal Reserve for signs of whether QE3 will be ended and on the ECB for signs that a new LTRO program will begin. However, how the PBOC acts is equally important considering its size and the effect its stimulus had in 2009 and 2010 when the global economy was still weak.
The Chinese authorities have been focused on combatting inflation and discouraging speculation in the housing market with the result that economic growth has underperformed prior expectations and SMEs have struggled with securing credit. This condition may be changing as the property market deflates and the interest rate outlook turns dovish.
This is all the more important because the Chinese stock market has not yet been subject to the same leveraged liquidity flows that helped inflate asset prices elsewhere. The CSI300 has been quite steady over the last few weeks as it pauses following its breakout in the summer. A sustained move below 2300 would be required to begin to question medium-term scope for additional upside.
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