As China's recovery wobbles, economists expect more policy easing

China may need more monetary and fiscal easing to halt an economic slowdown in the wake of torrential rains and flooding, and authorities' tough response to outbreaks of the highly transmissible coronavirus Delta variant, economists say.

Nomura lowered its China GDP growth forecast on Wednesday to 5.1% in the third quarter and 4.4% in the fourth quarter, from 6.4% and 5.3%, respectively.

It also cut its full-year growth projection to 8.2% from 8.9%, citing the impact of Beijing's tough stance on COVID control due to the emergence of the coronavirus Delta variant in many major cities.

While calling China's zero-tolerance approach to containing the virus "increasingly costly", Lu Ting, chief economist at Nomura, said he expects Beijing to keep policy rates steady this year in favour of a mix of "targeted tightening" and universal easing.

"However, we believe these policy easing measures might be insufficient at reversing the growth downtrend," he said.

Policy insiders and analysts told Reuters that China is poised to boost infrastructure spending, while the central bank may take modest easing steps.

In a note, Goldman Sachs economists said they expect easing to focus on fiscal stimulus and government bond issuance, as well as a reserve requirement ratio (RRR) cut in the fourth quarter.

Standard Chartered, ING, OCBC Bank and Pinpoint Asset Management have also recently suggested possible further RRR reductions after the central bank surprised markets in July with a broad cut.

"Two RRR cuts in 2021 would not contradict the prudent monetary policy stance, but would help to reduce corporate borrowing costs, prevent M2 and TSF (total social financing) growth from slowing further, and pre-empt GDP growth from slipping below 5% year-on-year in Q4," said Li Wei, senior China economist at Standard Chartered.

The results of a Reuters poll of 82 financial institutions this week echoed that view, with nearly a quarter of participants expecting an RRR cut in the next three months, and some forecasting cuts to the one-year loan prime rate (LPR) and medium-term lending facility (MLF) rate.

Those expectations pushed China's benchmark 10-year yield to a more than one-year low of 2.7975% this week after the latest Politburo meeting revealed no change in stance, and as virus concerns and weak manufacturing data open the door to more easing.

But with local governments expected to issue more bonds to underpin economic growth, the dip could be short-lived.

"August could reach the peak of the government bond supply...with total net issuance of government bonds likely to hit 1 trillion yuan," said Liu Yu, an analyst at Guangfa Securities.