China: Easing case strengthens on weak PMIs – Commerzbank

Commerzbank‘s Dr. Henry Hao argues that two months of broad Purchasing Managers' Index (PMI) contraction leave China’s Gross Domestic Product (GDP) growth tracking below the official 4.5%-5.0% target, intensifying pressure on Beijing. Fiscal spending is slowly easing from austerity, with new coordinated measures planned for H2. The People's Bank of China (PBoC) signals moderately loose policy and potential Reserve Requirement Ratio (RRR) and rate cuts, with pre-emptive easing before year-end more likely.

Fiscal and monetary support under pressure

“The cumulative weight of two consecutive months of broad PMI contraction intensifies pressure on Beijing to deliver more substantive policy support. GDP growth is tracking below the official full-year target range of 4.5%-5.0%, with the economy having gotten off to a sluggish start in Q2.”

“On the fiscal side, government spending contracted 4.4% yoy in July, an improvement from June's 11.9% decline, suggesting a gradual easing of the austerity stance that had weighed heavily on activity. Vice Finance Minister Liao Min confirmed that new coordinated fiscal and financial policies are being drafted for deployment in H2, signaling that the fiscal response is being calibrated.”

“On the monetary side, the PBoC's Q2 monetary policy implementation report reaffirmed a commitment to moderately loose policy and vowed to strengthen counter-cyclical adjustments, while signaling plans to make greater use of overnight reverse repo operations as a liquidity management tool.”

“With the August PMI data providing fresh evidence of demand-side fragility and the fiscal rollout running behind schedule, the case for pre-emptive monetary easing before year-end has strengthened.”