* China: The Premier hinted at a selective easing
* Premier Wen Jiabao hinted at a possible easing yesterday by seeking “well timed and measured pro-active fine tuning” in macro policy. This is the first time in a while that a senior government official used the phrase “pro-active” in economic policy speech.
* On the monetary front, we take Wen’s remarks as a hint for selective and measured easing. We think the government may be ready to allow more lending to areas desperate for funding, while keeping the overall monetary policy normalization process intact.
* The second implication, in our view, is that Beijing may be ready to cut the reserve requirement rate in small steps. We would not be surprised to see a cut in the RRR combined with a hike in interest rates, as Beijing attempts to rebalance the weight of its quantitative policy tool (RRR) and price tool (interest rates).
* On the fiscal front, we think that the government will focus the next stimulus (when it becomes necessary) on consumer subsidies, rather than infrastructure investments as in 2009. Tax reform has been discussed by the Premier.
* The key points, in our view, on Wen’s comments are as follows:
1 This is a game-changer to Wen’s thinking as far as macro policy is concerned.
2 This is Wen’s last year as the Premier, hence any meaningful policy changes probably would need to be executed by Li Ke Qiang and Wang Qishan, the two vice premiers and the expected heads of the next generation of leaders.
3 We expect a cut in the RRR by up to 100bps (to 20.5%) within six months, but would not be surprised to see interest rate hikes. This would lead to a net easing in the liquidity conditions in the banking system at the margin.
4 Any easing in lending policy will likely to be limited and selective, targeting the SMEs. We believe ”monetary normalization” is still intact in the long run, despite this short-term twist.
5 Housing policy is unlikely to be changed at this stage.
6 We do not expect an imminent launch of fiscal stimulus, but if necessary, Beijing will focus on consumer subsidies, rather than infrastructure projects like in 2009.
7 This is not a game changer to China’s growth prospects, as we continue to look for an economic slowdown, despite the ”selective and measured proactive fine tuning”.
8 The economy will continue to suffer from the de-banking (banks failing to act as financial intermediary) and de-investment (companies failing to invest in the real economy) process.
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