China Economists Ramp Up Expectations for Rate Cuts, Spending

As China's economic growth slows, economists are increasingly anticipating further monetary easing measures to stimulate the world's second-largest economy. Recent macroeconomic data, such as a tepid recovery in domestic consumption and weak inflationary pressures, has created space for policymakers to bolster the economy. Let's delve into the expectations for rate cuts and increased spending in China.



In the first half of 2024, China's GDP grew by 5% year-on-year, with the second quarter expanding at a rate of 4.7%. Inflation, as measured by the consumer price index (CPI), increased by 0.3% year-on-year in October, the lowest level since 2020. The producer price index (PPI) fell by 2.8% year-on-year and 0.1% month-on-month, indicating weak corporate willingness to invest.

These figures suggest that China's economy is still in need of stimulus, driving expectations for further rate cuts and increased spending. In September, the People's Bank of China (PBOC) lowered the seven-day reverse repo rate by 10 basis points to 1.70% and trimmed a clutch of interest rates known as the standing lending facilities (SLF) by 10 basis points. This marked the first full-range rate cut in nearly a year.



The PBOC's actions follow weaker-than-expected second-quarter GDP growth and speculation about a potential Fed rate cut. Banks also lowered the one-year loan prime rate to 3.35% and the over-five-year LPR to 3.85%, indicating a focus on short-term policy rates.

Economists now expect the PBOC to lower the reserve requirement ratio (RRR) for commercial lenders, which would free up liquidity and encourage lending. Additionally, further cuts to key policy interest rates and existing mortgage loan interest rates are anticipated to boost consumer spending and investment.

The gradual release of these policy packages aims to shore up market sentiment, unleash pent-up consumer demand, and drive a pickup in prices, putting the economy on a more favorable growth trajectory. However, policymakers must balance these measures with financial stability concerns, such as excessive borrowing and lending, asset bubbles, and increased non-performing loans.

In conclusion, China's economists are ramping up expectations for rate cuts and increased spending to stimulate the economy. Recent macroeconomic data and the PBOC's actions suggest that further monetary easing measures are on the horizon. As the world's second-largest economy navigates domestic and global headwinds, policymakers must carefully balance growth and financial stability to achieve their targeted economic growth rate of around 5% in 2024.

Disclaimer: Action AlertsPLUS, managed by the article's co-writer, holds no positions in any mentioned securities.