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Economy

China will need to cut rates again in 2015

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Many economists expect the yuan to remain weak next year.   © Reuters

HONG KONG -- China's central bank is likely to lower interest rests once or twice next year, according to a majority of economists responding to a quarterly survey by Nikkei Inc. and NQN.

     While China's leadership is moving to lower its economic growth target to around 7%, many observers expect additional monetary stimulus will be needed to achieve even this slower rate.

     The world's second-largest economy will grow 7% in real terms next year and 6.9% in 2016, according to the average forecasts of the 23 Hong Kong- and mainland-based economists surveyed in mid-December. Their estimates for this year's growth rate average 7.3%, falling somewhat short of China's goal of "about 7.5%."

     With the falling price of crude oil tempering inflation, the economists see growth in China's consumer price index holding steady at 2.1% next year.

     The Chinese economy is facing strong headwinds, notably falling real estate prices and weak export growth, wrote Louis Kuijs at RBS. China will be hard-pressed to achieve 7% growth without macroeconomic policy support, Kuijs argued.

     In November, the People's Bank of China cut interest rates for the first time in 28 months. Seventeen of the 23 economists surveyed predict one to two additional reductions ahead next year. Many also expect the PBOC will cut the reserve requirement ratio -- the level of cash that commercial banks must leave on deposit with the central bank -- in order to encourage lending. After such a significant drop in the price of crude, China has more freedom to exercise monetary policy, wrote Xie Yaxuan at China Merchants Securities.

     But few of the economists surveyed expect that additional interest rate cuts will perk up the property market. Such monetary stimulus will stabilize real estate prices only in major cities but do nothing against the market's biggest problem: oversupply in less populated areas, wrote Yao Wei at Societe Generale.

     China has a housing bubble on its hands, and while monetary policy could postpone a correction, it cannot prevent one, argued Richard Jerram at Bank of Singapore.

     While a troubled real estate sector remained the most commonly cited risk to the economy, many respondents also selected local government debt. Declining income from land sales is straining local finances, wrote Kenny Wen at Sun Hung Kai Financial. Monetary easing may only prolong local government debt problems by facilitating new borrowing, warned Chris Leung at DBS Bank.

Currency weakness to continue

Many of the economists expect the yuan to remain weak against the dollar into next year. The spread between U.S. and Chinese interest rates, a key factor in the relative strength of the two currencies, is expected to widen as the Federal Reserve moves to raise rates while the PBOC loosens monetary policy. The yuan will be trading at 6.157 to the dollar at the end of 2015, according to the economists' average forecast.

     But the Chinese currency will only weaken so far, economists predicted. Helen Qiao at Morgan Stanley wrote that after a few months of continued weakness, the yuan will rise gradually as exports recover and China's trade surplus grows.

     As it tries to internationalize the yuan, the PBOC is clearly resorting to fewer direct foreign exchange interventions, wrote Ben Kwong at KGI Asia.

     Economists responding to the survey: Arjen van Dijkhuizen, Asia ABN AMRO Bank; Liu Li-Gang, ANZ; Richard Jerram, Bank of Singapore; Yang Zhi, Bank of Tokyo-Mitsubishi UFJ; Li Miaoxian, Bocom International; Xie Yaxuan, China Merchants Securities; Liao Qun, Citic Bank International; Tao Dong, Credit Suisse; Kevin Lai, Daiwa Capital Markets; Chris Leung, DBS Bank; Zhang Zhiwei, Deutsche Bank; Song Yu, Goldman Sachs; Hu Yifan, Haitong International Securities Group; Qu Hongbin, HSBC; Zhu Haibin, J.P.Morgan; Kelvin Wong, Julius Baer; Ben Kwong, KGI Asia; Helen Qiao, Morgan Stanley; Hua Changchun, Nomura; Louis Kuijs, RBS; Yao Wei, Societe Generale; Shen Lan, Standard Chartered; Kenny Wen, Sun Hung Kai Financial.

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