China's gradual recovery is underway (3)

Moderate recovery

Overall, the October macro data set is positive for market sentiment and suggests a continuing moderate recovery in China's economy. We believe the monetary policy loosening that started in the second quarter is continuing to have an effect. According to the third-quarter monetary policy report from the People's Bank of China, the weighted average rate of banks' lending dropped to 6.97 percent as of September from 7.6 percent in the first quarter. Fewer loans were priced above the benchmark rate (64 percent in September, compared with 70 percent in March), while around 11 percent of total loans were priced below the benchmark rate, up from only 4.6 percent in March.

We believe China's interest rate-cutting cycle has ended, as the central bank seems to believe that rates are already at an appropriate level, and that a further drop in real lending rates can be achieved via the 30 percent floor of the band.

Given that the economy is stabilizing and showing signs of gradual recovery, we expect a mildly supportive policy stance - characterized by measured and targeted stimulus - for the rest of 2012.

Shen Lan is an economist with Standard Chartered Bank. The opinions are her own.

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