CNBC reports that People's Bank of China (PBoC) is poised to move carefully toward easing monetary policy, even as the U.S. is on its way to tightening policy.
The PBoC will need to strike a delicate balance, as policymakers keep a firm eye on inflation and the rising cost of U.S. dollar-denominated debt.
Analysts say that easing monetary policy may not come in overt moves like cutting the amount of cash that banks must hold as reserves. Instead, China will likely seek targeted moves.
Here's why. For one, divergence with the U.S. could have many consequences for the market. Jefferies' analysts said that many Chinese companies, especially property developers, have raised large amounts of U.S. dollar-denominated debt. That's going to become more difficult to repay when the U.S. dollar climbs or U.S. yields start to rise on the back of the Federal Reserve's planned reduction in asset purchases.
Targeted monetary policy adjustments
Analysts have long pointed out that China's unique economic structure relies more on an array of monetary policy levers, rather than a single interest rate.
"Monetary policy will be loosened appropriately," Zong Liang, chief researcher at the Bank of China said.
While keeping overall monetary policy at a "normal" level, he said the central bank could ease policy for specific sectors. For example, the PBOC could help businesses struggling to bear the high cost of raw materials. Zong also expects support for stable economic growth will include a boost to infrastructure.
Letting the property market shake out
Aidan Yao, senior emerging Asia economist, AXA Investment Managers noted that Beijing's tight control over traditional channels of implementing monetary policy – including the housing market – will limit the overall stimulus effect of policy easing.
"Seeing a broader and long-lasting slowdown of the real estate sector is probably [the] largest downside risk that we need to monitor," said Francoise Huang, senior economist at Euler Hermes, a subsidiary of financial services firm Allianz.
Huang doesn't expect Beijing to allow the economy to slow down so drastically that China can barely meet its GDP target of 6% growth this year. Most economists expect growth of around 8% this year.