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We continue to expect monetary easing. Although monetary policy is becoming less stimulative on its own, easing nonetheless helps to ensure an accommodative environment in which fiscal measures and structural reforms can take root. We forecast one benchmark rate cut at end-2015 and another in early 2016. For RRR, we expect 300 bps of cuts in 2016 after 1-2 more cuts in 2015. Additionally, we think there will be more proactive use of liquidity tools such as PSL or loan-collateralized re-lending.
What measures, in your opinion, should be introduced by the government in order to give the economy a healthy push?
Given the relatively strained local government finances, limited effectiveness of monetary policy, further reforms are necessary to maintain growth, which is still a priority, as highlighted in the recently concluded fifth five year plan.
The government plans to rebalance the economy by: boosting consumption; promoting services over construction industry; encouraging private sector growth and deepening SOE reforms; upgrading manufacturing while reducing obsolete capacity; and distributing more benefits of economic growth to the poor and expanding social safety nets.
Our economists also think faster restructuring and exit of excess capacity, unviable firms and bad loans is still needed. Thus, far restructuring has been slow, due to concerns over employment and short-term growth. We expect acceleration of SOE restructuring and fiscal reforms in 2016-17. The government should allow for more bankruptcies and push for more rapid write-offs of nonperforming loans. Launching serious corporate restructuring by closing zombie companies may also lead to improved business sentiment and margins down the road, and eventually more private sector growth.
For labour market and social reforms, we expect policymakers to provide more support to employment and strengthen the social security net. As outlined in the new five year plan, the government plans to expand pension and serious illness health care insurance coverage to the whole population and sharply reduce poverty. The government will also likely need to increase fiscal spending on social welfare and to lower labour taxes. These measures should all help to support consumption by reducing household saving rate and reduce income constraints on the very poor.