By Anisha Sircar
(Reuters) - China is likely to persist with a gradual approach to stimulating its economy even as recent moves by its policymakers are unlikely to revive sentiment without further supply-side reforms and aggressive easing measures, market watchers said.
Earlier this week, China announced its biggest ever reduction in the benchmark mortgage rate - a move that left markets feeling underwhelmed.
Howe Chung Wan, head of Asia fixed income at Principal Asset Management, anticipates a more gradual approach from Chinese policymakers, he told the Reuters Global Markets Forum (GMF).
"Policy makers are focused on addressing the medium-term structural issues in debt, property and other parts of the economy where leverage is overextended," said Wan, whose firm manages more than $540 billion in assets.
At the same time, they want to ensure the "economy doesn't spiral" by using specific measures to support the cyclical nature of the Chinese economy, he said. "Hence, no major big support measures expected."
Alicia Garcia Herrero, chief Asia-Pacific economist at Natixis, said this week's loan prime ratio (LPR) cut by the People's Bank of China (PBOC) "is too little, too late".
The PBOC risks running behind the curve with this approach, as data showing China's headline inflation declined 0.8% in January calls for much faster action, Herrero said.
Chi Lo, senior markets strategist for Asia-Pacific at BNP Paribas (OTC:BNPQY) Asset Management, highlighted the need for maintaining a larger "r-g" gap, keeping real interest rates significantly below real output growth to sustain economic growth and reduce debt.
"Monetary easing has to continue, with more aggressive injection of net liquidity," Lo said, adding that if PBOC action continues to underwhelm, GDP growth could be stuck around 4%-5%, which could further hurt companies' earnings outlook and asset prices.
With rising default rates, even beyond the real estate market, it is "important to lower the real rate for an economy that is struggling to grow at potential," Herrero of Natixis said.
With rates above equilibrium, China could risk ending the year with a negative output gap, she warned.
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