Skepticism over the outlook has remained in spite of stronger-than-expected 3Q15 GDP growth of 6.9% YoY. That was followed almost immediately by the simultaneous cut of 25bps/50bps respectively on benchmark rates/reserve requirement ratio last Friday. The lmove was the sixth since Nov 2014.
The incremental effectiveness of monetary policy to stimulate the real economy is weakening given the hefty domestic debt burden. Newly generated liquidity is partially channeled to debt repayment and to ease cash flow shortage. Successive interest rate cuts do not necessarily guide the cost of capital lower due to rising credit risks. Loosening also does not resolve the problem of overcapacity as evidenced by the persistent negative reading for the PPI for more than 4 years. And it does not boost consumer confidence instantly either.
Nevertheless, the tactic somewhat eases short term liquidity stresses. At the current level of RRR at 17%, there is plenty of room to cut further. The outlook of interest rate cuts is more complicated given its weakening impact on the RMB amidst persistent capital outflow as evidenced by dwindling of foreign reserves.
Arresting the fall of economic growth in the short term requires an expansionary fiscal policy. Beijing can easily speed up project approvals. But execution requires the cooperation of local governments. The ongoing anti-corruption drive somewhat compromises the speed of project implementations at this juncture. It may take longer time for fiscal policy to yield its impact on growth this round, as a result. Against such backdrops, the meeting of the 13th 5th-year plan beginning this week will likely lower the medium term target GDP growth between 2016-2020 to 6.5%-7.0%. It is important to manage market expectation well to accept the "new normal" range of GDP growth.
