China ‘Unlikely’ to Pursue Aggressive Monetary Easing in 2016: Xinhua Report

BEIJING (Reuters) – Speculators expecting further monetary easing in China are likely to be disappointed, according to an editorial by state media Xinhua published late Wednesday. The editorial emphasizes that such measures could disrupt efforts to address industrial overcapacity and eliminate asset bubbles.

"Anticipation for additional cuts is growing, particularly since moderate consumer inflation in July has created ample room for policy adjustments," Xinhua noted. However, it warned that hopes for cuts may not materialize.

The People’s Bank of China (PBOC) is not expected to frequently reduce interest rates or the reserve requirement ratio (RRR) during the latter half of the year, Xinhua asserted. The publication pointed out that frequent cuts would jeopardize the government’s reform agenda for bloated industrial sectors.

"Drastic easing of the RRR and interest rates would not only generate excessive liquidity but also undermine China’s efforts to tackle overcapacity and mitigate asset bubbles," the editorial stated.

This piece was the second editorial from Xinhua this week indicating that new rate cuts are unlikely in 2016. It also mentioned that further easing could create additional downward pressure on the yuan, benefiting exporters but potentially leading to capital flight.

The yuan’s central parity rate has fallen by more than 2 percent against the dollar this year. In 2015, the PBOC implemented interest rate and RRR cuts in response to a significant stock market crash in an effort to sustain economic growth.

Despite the PBOC’s cautious stance, some analysts still anticipate additional interest rate reductions before the year concludes. Factors such as a downturn in the housing market, sluggish consumer spending, and signs that inflation may have peaked were cited as reasons for potential rate cuts, according to a report from the Commonwealth Bank of Australia.

Discussions regarding the possibility of further monetary easing have intensified, particularly in light of a recent statement from China’s state planner that called for interest rate and RRR cuts "at the appropriate time," although this comment was later removed from their website.