China also started to ease last week, lowering its reserve requirement ratio by half a percentage point to 21% for large commercial banks (17.5% for smaller banks). This was its first cut in almost three years, and we believe that it marks a shift in policy that could produce further easing if economic growth and inflation slows further, particularly if European recession becomes contagious. Beyond monetary policy in China, BCA research notes that: "fiscal policy will play a much bigger role than monetary in boosting growth this time. There has been a slew of fiscal easing policies in recent months: income tax cuts, reductions for micro-firms, tax reforms for the service industry in certain cities, and most recently an increase in allowance for low-income households. Moreover, public-sector capital spending will likely ramp up again in the coming years." We expect that reforms for rebalancing away from investment and export led growth towards a more consumption - and service-oriented economy will accelerate with next March's leadership transition. In the meantime, judging by China's stock market, which is notably underperforming the rest of the world, policymakers in China are acting too timidly.
David Fuller's view China's Shanghai A-Shares Index (weekly
& daily) is in its fifth week of
downward drift since the late-October to early-November rally petered out.
Although still in an overall downward trend, short-term indicators have swung from oversold in October to overbought in early November and oversold once again. There were also two upside key day reversals in October and it would be unusual if the Index move much below those levels, particularly as historic PER and Yield valuations are near levels which have supported significant rallies in the past. Nevertheless, another upward dynamic is required to reaffirm support in this region.