Experts: Monetary policy fine-tuning likely

China may need to fine-tune its macro policy to lend more support for economic growth, as downside risks have risen amid the recent local COVID-19 resurgences while mild inflation prospects have offered the room for further easing, experts said on Monday.

They commented as the People's Bank of China said on Monday that it will support the real economy with effective measures while refraining from flooding the market with liquidity, supporting the country's high-quality development with moderate growth in money supply.

Monetary policy independence will be strengthened, the central bank said in its second-quarter monetary policy report, with policy pace and intensity to be properly handled in accordance with the domestic economic situation and price levels.

Experts considered the remarks a signal that further lowering of the reserve requirement ratio and even cutting the policy interest rate could be within the Chinese central bank's policy toolkit in the coming quarters, even as the US Federal Reserve is expected to taper its stimulus package.

The Political Bureau of the Communist Party of China Central Committee stressed at a recent meeting the need to improve macro policy independence and to maintain ample liquidity to support the recovery of smaller businesses and stressed industries.

"We continue to expect strong local government bond issuance and another RRR cut in the coming months," economists with Goldman Sachs said in a report, citing that the Chinese economy is facing greater headwinds due to the resurgence of local COVID-19 cases in some areas.

Goldman Sachs has revised down its forecast of China's full-year GDP growth from 8.6 percent to 8.3 percent to factor in disruptions due to the virus, especially on the service sector, the report said.

Zhang Bin, a senior researcher at the Chinese Academy of Social Sciences' Institute of World Economics and Politics, said that now is a good time for China to cut interest rates as domestic demand remains insufficient and the monetary policy of the United States has not entered a tightening cycle.

"Domestic consumption remains relatively weak compared with the pre-COVID level and growth in the labor market has come to a standstill," Zhang said.

China's mild inflation prospects have provided the room for monetary policy strengthening support for the economy if downside risks bite, said Wang Qian, Asia-Pacific chief economist at the United States-based Vanguard Investment Strategy Group.

Wang said she thinks China's full-year growth in consumer price index is likely to come in between 1 percent and 1.5 percent, below the government's control target of 3 percent.

The country's CPI, a main gauge of inflation, grew by 1 percent year-on-year last month, down from 1.1 percent in June, pointing to a generally stable price situation, the National Bureau of Statistics said on Monday.

Growth in the producer price index, which gauges factory-gate prices, however, picked up to its highest level of the year of 9 percent in July, up from 8.8 percent a month earlier and the same as in May, the bureau said.

Elevated industrial goods prices have sparked concerns about whether these may filter through to consumer prices in the coming months and increase inflationary pressure.

Most experts, however, said the inflationary pressure brought by high raw material prices will be largely offset by falling prices of pork, COVID-19 cases weighing on demand for services, and sufficient supply capacity in downstream sectors.

Wu Chaoming, chief economist at Chasing Securities, said the possibility of a broad-based surge in prices is low, as the intense competition among downstream companies means they will bear much of the price pressure themselves instead of passing it on to consumers.

"The high raw material prices have squeezed the profit margin of mid－and downstream companies and weighed on their willingness to expand investment, making more supportive measures necessary," Wu said.