By Helen Qiao and Zhu Yuande | 2013-3-18 | NEWSPAPER EDITION
WE believe China's official policy stance will remain unchanged, but the government's official economic targets in the National People's Congress suggest a more proactive fiscal stance and a more prudent monetary stance than the current level.
The growth recovery is not on a strong-enough footing to allow any aggressive tightening: Mixed signals from the recent January-February data release suggest that policymakers are likely to refrain from aggressive monetary tightening in the near future - especially after seeing the recent cost-cutting campaign is starting to take a toll on final consumption growth.
Our baseline view is that the government will combine the tightening bias in monetary policy with more intensive fiscal expansion in the new few months. In our view, the potential monetary tightening is likely to take place in two phases.
Before CPI inflation exceeds 3.5 percent, the central bank will maintain a tightening bias but keep liquidity conditions accommodative. After inflation rises above the threshold, the central bank will conduct further tightening - including a possible interest rate hike before the year-end.
CPI inflation is still within policymakers' comfort zone, so we expect monetary tightening measures to take place through open market operations and window guidance in the next few months. In addition, the government is likely to ramp up the surveillance level on off-balance sheet lending, especially if it continues to outpace bank lending.
Meanwhile, the potential strengthening in domestic demand in the second quarter will likely induce a faster rise in consumer prices in the third quarter.
We expect the central bank to hike the benchmark interest rates by 25 basis points before year-end: That will come in response to inflation. Our forecast also suggests that the central bank will likely be more tempted to use the interest rate policy tool for monetary control instead of loan quotas to curb inflation, in view of the rapid development of off-balance sheet lending in the past few years.
These activities are de facto interest rate liberalization amid a gradual disintermediation, posing new challenges to the monetary authority's ammunition box for monetary control.
We forecast property policy to remain supportive of more housing developments. Even when the new government follows up with detailed measures for property, we don't think policymakers will try to curtail property transactions in the entire country and discourage any increase in the housing supply.
Helen Qiao and Zhu Yuande are economists with Morgan Stanley. The article was based on a report dated March 13.