China is sending a signal to the market that monetary easing measures will be applied whenever the economy is showing signs of weakness, just like in the United States and Europe, according to a top economist at global asset management firm Schroders.
“When you have this environment where central banks are trying to spur growth, it means you’re getting to a world where ‘bad news is good news’, in the sense that bad news in the economy can mean you get more liquidity and so markets tend to go up,” Schroders chief economist and strategist Keith Wade said on Tuesday.
“That’s been a pattern that we have seen in the US and Europe. We have not seen it in China [before], but what we have now is the signal from the authorities that they want to spur growth. I think that changes the mentality or psychology of the market in China,” he added.
The country is expected to further cut the benchmark interest rate by 100 basis points and slash the banks’ reserve requirement ratio (RRR) by 200 basis points in the coming year as economic growth is not robust enough, Wade said.
He said the supply glut in the housing market and the depreciation in the Japanese yen are two factors that will spur Beijing to launch more easing measures.
“The housing market is very oversupplied, and the construction sector really needs to cut back,” Wade said. “In tier-three cities you have an overhang of about three years, while in tier-one cities the estimates I saw suggest about 12 months,” he said.
The weakening Japanese currency will also put pressure on China’s economic growth, as Japanese exports will become stronger at the expense of trade rivals such as China and South Korea, he said.
In the US, the Federal Reserve is expected to raise the federal funds rate to 1.25 percent by end of next year, and is likely to raise it further to 2.5 percent in 2016.
The country’s unemployment rate is expected to come down to either 5 percent or 4.5 percent in 2015, and that will prompt the Fed to start raising interest rates, Wade said.
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