Goldman Sachs Group Inc. and HSBC Holdings Plc forecast that China will cut interest rates in 2012, putting the banks at odds with most of their rivals, who see elevated inflation preventing a reduction.
The People’s Bank of China reduced lenders’ reserve requirements on Nov. 30 for the first time since 2008 as Europe’s debt crisis deepened. Eleven economists of 20 in a Bloomberg News survey conducted yesterday and today say rates will stay unchanged through next year and another four predict increases. Goldman and HSBC are among five that see cuts.
China’s challenge in loosening monetary policy is to sustain the expansion of the world’s second-largest economy without spurring price gains, fueling bad loans or reigniting a real estate boom that has started to deflate. Inflation will remain too high for the benchmark one-year deposit rate to be lowered from the current 3.5 percent, according to Mizuho Securities Asia Ltd.
“The authorities should be careful that the loosening does not go too far in order to prevent a repeat of mistakes during the 2008 global financial crisis,” said Ma Xiaoping, a Beijing- based economist with HSBC. Ma said rates may be cut after inflation falls below 3 percent in the second half of next year.
Across Asia, policy makers are moving to preserve growth. In Tokyo, Prime Minister Yoshihiko Noda yesterday ordered a fourth extra budget, a step unprecedented since postwar reconstruction, while Thailand cut interest rates this week and Indonesia did the same on Nov. 10.
Spending Cuts
In a signal that Japan's post-earthquake rebound may be fading, companies cut spending at a faster pace in the most recent quarter, data released in Tokyo showed today. Capital spending fell 9.8 percent from a year earlier, the Finance Ministry said.
The MSCI Asia Pacific Index swung between gains and losses and was little changed at 11:11 a.m. in Tokyo.
Data due today may show the U.S. jobless rate holding steady at 9 percent, according to analysts’ median estimate. A better-than-forecast manufacturing expansion reported yesterday indicated the world’s largest economy is weathering the crisis that prompted a Federal Reserve-led effort this week to ease borrowing costs for financial firms.
In the euro area, a report today may show that producer- price inflation cooled as austerity measures and weakness in global demand threaten to trigger a recession in the region.
Worse Than Lehman
“The current crisis is grimmer and more challenging than the global financial crisis triggered by the Lehman Brothers bankruptcy in 2008,” Zhu Guangyao, a Chinese vice finance minister, said at a forum in Beijing yesterday. “So the most imperative task now is to try our best to stimulate global economic growth.”
HSBC’s Ma said three more reserve-ratio cuts are likely in the first half of next year, along with tax breaks and fiscal stimulus, after a report yesterday indicated Chinese manufacturing contracted for the first time since March 2009.
While China’s inflation has slowed to 5.5 percent from a three-year high of 6.5 percent in July, the rate remains 2 percentage points higher than the one-year deposit rate, discouraging saving and adding to the risk of asset bubbles.
“Inflation will decline quickly in coming months as cooling economic growth caps demand,” said Song Yu, a Beijing- based economist for Goldman, who says a rate reduction may come in the second quarter of 2012, when year-on-year consumer-price gains may fall below the level of the benchmark deposit rate.
HSBC sees the one-year lending rate falling by a quarter percentage point to 6.31 percent in the second half of 2012, with the deposit rate declining to 3.25 percent. Credit Agricole CIB, Capital Economics Ltd. and Hang Seng Bank also see cuts.
Property Slowdown
Besides weakness in export demand, China’s real-estate market is cooling because of a government campaign to limit the risk of asset bubbles and make housing more affordable after record lending in 2009 and 2010 triggered price gains. Property risks overshadow the economy as declines in home sales threaten to trigger developer collapses, the Organization for Economic Cooperation and Development said this week.
“Monetary easing and more expansionary fiscal policy is necessary to avoid a sharp downturn as external uncertainty is increasing and domestic growth momentum slowing,” said Shen Jianguang, an economist at Mizuho who previously worked for the International Monetary Fund. “Yet, inflation remains high and is expected to stay above 4 percent next year which could be still too uncomfortable for an interest rate cut.”
Benchmark rates have been on hold since July after five increases that began in October last year. Deutsche Bank AG and Morgan Stanley are in the majority arguing that the central bank’s pause will continue through 2012.
‘Excessive Speculation’
Credit Suisse Group AG says the reserve-ratio move is policy fine-turning and not a reversal of a monetary stance that the government describes as “prudent.” Credit Suisse, Mizuho, Citigroup Inc. and Australia & New Zealand Banking Group predict interest rates will rise by the end of next year, the survey showed.
Deposit rates are too low, fueling “excessive” speculation in financial assets and making an increase inevitable, Dong Tao, a Credit Suisse economist in Hong Kong, said in a note.
The half percentage point reserve-requirement cut that takes effect on Dec. 5 may pump about 350 billion yuan ($55 billoin) into the financial system, according to an estimate by UBS AG. In yesterday’s survey, Capital Economics forecast five more reductions in reserve ratios before the end of next year.
“The speed at which the euro-zone crisis is escalating suggests external conditions will be more challenging over the next year than previously seemed likely,” Mark Williams, a London-based economist for Capital Economics, said in a note. “In turn, policymakers are likely to respond more forcefully.”
To contact Bloomberg News staff for this story: Zheng Lifei in Beijing at lzheng32@bloomberg.net
To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net
