China is unlikely to start a programme of rapid stimulus despite cutting the reserve ratio requirement (RRR) for banks last week, Schroders’ head of Asian equities argues.
Robin Parbrook points out in his latest note that the People’s Bank of China lowered the RRR by 50 basis points – its first cut since 2008 – and sparked speculation the country is about to embark on further fiscal and monetary easing to boost growth.
However, he expects any stimulus from the government to be piecemeal and predicts that efforts such as “minor tweaks” to reserve requirements are unlikely to have a significant effect on Chinese growth.
“Markets are set to be disappointed by the pace at which this exercise unfolds,” he says. “What we expect is a degree of ‘stop-go’ policies over the coming months, which are unlikely to have a meaningful impact of economic development.”
Parbrook adds he would be “very concerned” if China decided to unveil large-scale monetary and fiscal stimulus, as this could have a serious impact on the economy’s overheating problem.
Despite a recent slowing in inflation and indications that manufacturing has contracted, China’s fixed-asset investment continues to outstrip GDP and retail sales still demonstrate high year-on-year growth – indicating the country “remains on the verge of overheating”.
Parbook concludes the Chinese economy has come to a “crunch point” and suggests its current growth model has reached the limits at which sustainable expansion can be realised.
“The country desperately needs to move towards an environment of market-driven interest rates and a more flexible foreign-exchange regime; after a period of pain this would allow the economy to rebalance and move to a healthier consumer-driven model,” he says.
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