China to take paced monetary easing

Lowering financing costs remains a policy priority for China in 2015 given the likely limited effects on lending rates from the benchmark interest rate cut on Nov 21, said Chang Jian, Barclays Chief China Economist.

Fundamentally, reduced capital inflows result in tighter system liquidity and rising bank funding costs, reducing banks' incentives to pass on the lending rate cut, Chang said in a note on Friday.

In the near term, the government is not likely to send too strong an easing signal, such as a required reserve ratio (RRR) cut, in view of the strong rally recently seen in the stock market, she said.

Chang expects a more paced monetary easing cycle and risks of a delay in the RRR cuts and interest rate cuts in 2015, believing that RRR cuts look unavoidable if lowering lending rates is a policy priority.

The Chinese central bank cut the benchmark interest rate for one-year deposits by 25 basis points and the one-year lending rate by 40 basis points on Nov 21, 2014.

This was the first adjustment to the benchmark rates since July 2012 and has boosted stock markets in Shanghai and Shenzhen.