China's 'Loose' Policy Approach Won't Change Any Time Soon

Following last week’s meeting by the Politiburo of China’s Communist Party, Nomura analyst Yang Zhao summarized the key points that Chinese leaders discussed and what he sees as the potential economic impact for China during the second half of 2015. Zhao believes that the tone of the meeting suggests that the “loose policy stance” that China has implemented in the first half of the year will continue for the time being.

Mixed Signals

According to Zhao, major economic indicators in China continue to strengthen, but the country’s economy suffers from structural deficiencies. China’s real economy could see significant improvement in the second half of the year, but the financial sector will likely continue to be weak following a volatile first half of the year that included wild market swings and shaky investor confidence.

Nomura is projecting 6.9 percent year-over-year GDP growth in China in the second half of 2015, just short of the 7.0 percent growth registered in the first half of the year.

Policy

Based on the discussions in the meeting, Zhao believes that Chinese monetary and fiscal policy will continue to be skewed toward loose rather than tight. Zhao also predicts a more targeted approach to policy, in which the government focuses more on measures to improve the real economy rather than stimulating the financial sector.

“We maintain our forecast of one more 50bp cut in the reserve requirement ratio (RRR) and one more 25bp benchmark interest rate cut in H2, with the next move likely to be [a] RRR cut in August,” Zhao explained.

Other Notes

The Politiburo also discussed reforms of state-owned enterprises (SOEs), taxation and the financial system. Zhao expects a SOE reform plan to be announced soon and would not be surprised to see the transition from business tax to value-added tax extended to sectors such as finance, construction and property development in the second half of the year.