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Yesterday, China Premier Wen Jiabao said he would seek a “well timed and measured pro-active fine tuning” in macro policy.Credit Suisse economist Dong Tao thinks this is a signal that some form of monetary easing is coming. “This is the first time in a while that a senior government official used the phrase “pro-active” in economic policy speech,” said Tao. “This is a game-changer to Wen’s thinking as far as macro policy is concerned but not China’s growth prospects.”
- On the monetary front, we take Wen’s remarks as a hint for selective and measured easing. We think the government may be ready to allow more lending to areas desperate for funding, while keeping the overall monetary policy normalization process intact.
- The second implication, in our view, is that Beijing may be ready to cut the reserve requirement rate in small steps. We would not be surprised to see a cut in the RRR combined with a hike in interest rates, as Beijing attempts to rebalance the weight of its quantitative policy tool (RRR) and price tool (interest rates).
- On the fiscal front, we think that the government will focus the next stimulus (when it becomes necessary) on consumer subsidies, rather than infrastructure investments as in 2009. Tax reform has been discussed by the Premier.
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