Marketmind: China to cut rates, but will it ‘go big’?

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.

The People’s Bank of China is expected to cut interest rates on Monday, but it may have to throw caution to the wind and ‘go big’ if it is to soothe the nervousness and concern around China currently sweeping through financial markets.

The Chinese central bank’s policy decision is one of three in Asia for investors to take in this week, with the Bank of Korea and Bank Indonesia both expected to keep interest rates on hold on Thursday.

The PBOC’s decision and wider developments around China’s markets and economy will dominate investors’ thinking this week along with the U.S. Federal Reserve’s annual Jackson Hole Symposium, where Fed Chair Jerome Powell will speak on Friday.

Investors will also be tuned into the summit of the BRICS group of major emerging economies – Brazil, Russia, India, China and South Africa – in South Africa this week, where Chinese President Xi Jinping will attend.

But whatever Xi says will likely be more political in nature. The assurances investors want from Chinese officials probably center more on monetary and fiscal policy.

Economists at Goldman Sachs and Barclays (LON:) are among the many who expect the PBOC to lower its one-year loan prime rate by 15 basis points to 3.40%, which would be a new low.

Despite Chinese policymakers’ conservative nature, the skew is surely for a bigger move on Monday, and further cuts and wider easing in the months ahead. The risk here would be to the currency, which is already extremely weak and vulnerable.

Economists are slashing their Chinese GDP growth forecasts and many doubt Beijing will meet its 2023 goal of 5.0%. Deflation, slumping trade activity and an imploding property sector are the familiar and increasingly serious risks.

Not only is the real estate crisis a threat to growth in its own right – the sector is a huge part of the economy – but the scale of indebtedness raises questions over the strength and stability of the $3 trillion shadow banking system.

Beijing is taking steps to bolster confidence, but so far these measures seem no more than tinkering around the edges. Chinese blue chip stocks are down 6% in the last two weeks, and financial conditions are the tightest since early December, according to Goldman.

China’s problems coincide with a deteriorating global backdrop. The dollar is surging, U.S. Treasury yields are breaking to new multi-year highs, and stock markets around the world are finally getting vertigo.

Much of that is perhaps being exaggerated by the seasonally thin market conditions of August. Either way, investors will be looking to Beijing and Jackson Hole this week for some degree of assurance and guidance.

Here are key developments that could provide more direction to markets on Monday:

– China interest rate decision

– Thailand GDP (Q2)

– Hong Kong inflation (July)

(By Jamie McGeever; Editing by Diane Craft)