China under Pressure to also Go into QE Following Dip in PMI

Feb 02, 2015 06:03 AM EST

(Photo : REUTERS/Petar Kujundzic) A photo illustration shows a $100 banknote placed above Chinese 100 yuan banknotes in Beijing.

The once red-hot economy of China may need to follow the example of western nations and introduce Quantitative Easing (QE) as monetary policy.

What may pressure Beijing to print more money is the slowdown in the Chinese economy as evidenced by the drop in the Purchasing Managers' Index (PMI) released on Sunday. The PMI went down to 49.8 in January from 50.1 in December. It missed by 0.4 the forecast by analysts surveyed by Bloomberg.

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The lower PMI, which went below 50 - the benchmark that separates growth from contraction - is just one of several economic indicators that confirmed the continuous slowdown of the Chinese economy.

The other landmarks are the largest weekly drop in stock market in 12 months and weakest revenue growth in 25 years. On Friday, the Shanghai Composite Index, China's benchmark, declined for a fifth consecutive day, while the yuan also weakened.

That would mean Beijing may need to follow the model used by western and industrialized nations in printing more money to stimulate the economy. Central banks from the euro zone all the way to Singapore had re-introduced QE as a monetary move amid cheaper oil prices that dampened inflation outlook.

In response to the weaker economy, the People's Bank of China cut in November interest rates for the first time in 24 months.

Bank economists, such as Zhang Zhiwei of Deutsche Bank in Hong Kong and Lu Ting of Bank of America, warned that economic data will continue to weaken in the coming months, placing more pressure on the Chinese central bank to pursue further quantitative easing action.

Zhao Qinghe, senior statistician at the National Bureau of Statistics, explained the lower PMI to seasonal falls, weaker commodity price and lower demand both in the local and foreign markets.

The bleak outlook will likely last until midyear, said Louis Kuijs, chief greater China economist of the Royal Bank of Scotland in Hong Kong. He attributed the gloomy forecast to very few drivers of growth that are doing well.