Moody's: China's monetary policy easing consistent with Moody's view that additional stimulus will be provided

The latest monetary policy action by China (Aa3 stable) is in line with our view that, as underlying growth slows, China's authorities are likely to respond with additional stimulus, Moody's Investors Service says. On Friday, China's central bank announced a 50 basis point cut in the reserve requirement ratio and a 25 basis point cut in the one-year lending and deposit rates.

We expect the ongoing economic slowdown to continue. Our forecast is for China's GDP growth to come in at 6.3% in 2016, after just under 7% this year. At these rates, China's GDP growth will be robust by global standards.

Additional monetary and fiscal stimulus will keep growth from slowing more rapidly, rather than raising growth to significantly higher levels. The slowdown is likely to remain focused on the industry and construction sectors where overcapacity and high leverage constrain the ability of corporates to respond to monetary easing. By comparison, the services sector is likely to be relatively resilient. The overall economic slowdown will be more marked in nominal terms as downside price pressures continue.

Slower growth is part of China's rebalancing process. Looking ahead, the main policy challenges lie in advancing market reform and addressing high levels of system leverage, while also ensuring the growth slowdown is smooth and that employment growth remains robust.