More room for nation to back real economy

With monetary tightening in the United States expected to slow down, China is likely to have greater room for monetary easing and witness a softer deceleration in external demand, helping the nation to achieve stable full-year economic growth of above 4 per cent, experts said.

While the US Federal Reserve approved a bold interest rate hike of 75 basis points for the second straight month in July to combat inflation, Fed officials agreed “it likely would become appropriate at some point to slow the pace of policy rate increases”, according to the minutes of their July meeting, which were published on Wednesday.

The pace of rate increases, the Fed minutes said, will depend on the implications of incoming information for US economic outlook and risks to the outlook.

Experts considered the minutes to be a signal that the Fed may slow the pace of its rate hikes in the coming months to avoid overdoing tightening measures that could tip the US economy into a sharp recession.

This, in turn, will help maintain global economic momentum, reduce the capital outflow pressures facing emerging economies, including China, and create more favorable external conditions for the country’s growth, they said.

Wen Bin, chief economist at China Minsheng Bank, said China’s monetary policy will have greater room to support the real economy as spillover effects of the Fed’s tightening fade with reduced capital outflow pressures on China.

In a report last week, the People’s Bank of China, the nation’s central bank, pledged to provide more substantial and higher-quality support for the real economy, while keeping a close eye on the spillover effects of the economic situation and monetary policy adjustments in developed economies.

Bucking monetary tightening in the US, China’s central bank cut a key interest rate on Monday to support economic recovery.

The central bank conducted 400 billion yuan ($59.2 billion) in medium-term lending facility operations at an interest rate of 2.75 per cent, down from 2.85 per cent a month earlier.

Thanks to the rate cut, the country’s loan prime rates－market-driven benchmark lending rates－are likely to decrease soon, helping to revive credit demand, boost market confidence and stabilise the real estate sector, said Wen from China Minsheng Bank.

With monetary and fiscal policy measures to expand consumption and investment, China’s economy is expected to achieve full-year growth of 4.2 per cent year-on-year, expanding by about 5 per cent in both the third and fourth quarters, he said.

Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management, a Swiss firm, said the Fed may slow the pace of tightening by raising interest rates by 50 basis points at its September meeting and 25 basis points in the next meetings as US inflation may have peaked in July.

“If the Fed’s rate hikes slow, it will be conducive to both China’s real economy and cross-border capital flow stability,” said Shao Yu, chief economist at Orient Securities.

This is because a slowdown in the Fed’s rate hikes can alleviate the recession risks of the US economy and therefore buoy demand for China’s exports, while lessening the depreciation pressure on the renminbi by slowing capital flows to the US, Shao said.