S&P says the risk of aggressive monetary stimulus in China remains low via ForexLive

Despite the rate cut on Friday S&P's chief economist in Asia, Paul Gruenwald, says it does not signal a renewed government intention to resort to aggressive stimulus to prop up the economy.

The main purpose of the rate cut, in our view, was to smooth the process of economic adjustment by ensuring appropriate funding costs

Real funding costs in China had been rising from two sources in recent months. First, some banks were charging higher nominal interest rates to selected borrowers as they continue to differentiate between sound and not-so-sound credits. Second, the decline in inflation meant that, for a given nominal interest rate, the real cost of borrowing was rising. With the economy continuing to slow, this tightening of monetary conditions was unwelcome and the authorities decided on further policy actions to counter the slowdown.

We believe slowing growth, including market expectations that China may miss its 7.5% annual GDP growth target this year, also put some pressure on the authorities to take action. Looking ahead, we continue to expect slower growth to help China in a few ways. First, it will rein in the financial excesses generated by fast credit growth in recent years. Second, it will free up resources to help rebalance the economy toward more consumption-led growth. A boost in external demand from the U.S. recovery will also help to support these efforts.

The Chinese government is well aware of these arguments, and we believe it will lower its GDP growth target to about 7% for the next few years, before trimming it further thereafter. Given the ongoing correction in the property market, we continue to see further downside risks to China's GDP growth

Our friends at Livesquawk reporting  and the debate continues as Adam highlighted over the weekend here

posted via ForexLive