China may move toward easy monetary policy, but must tread carefully

BEIJING — China’s central bank is poised to move carefully toward easing monetary policy, even as the U.S. is on its way to tightening policy.

In moving in the opposite direction, the People’s Bank of China 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, or the RRR — one of many policy tools that the central bank holds. 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 pointed out in a note Monday 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.

The Fed released meeting minutes last week that showed the U.S. central bank is on its way to tightening, potentially as soon as next month. The move comes as U.S. policymakers worry about whether inflation will persist.

China faces the same challenge. The producer price index, a measure of production costs for factories, rose by a record 10.7% in September from a year ago.

“Persistent inflationary pressure limits the potential scope of monetary policy easing,” said Zhiwei Zhang, chief economist at Pinpoint Asset Management.

But it’s become clearer than ever to many economists that China will need to ease.

Third-quarter GDP data released Monday showed China’s economy slowed more than expected. A power shortage has restricted factory production. Tighter regulation on debt in the real estate industry has cut into a sector that’s contributed to a quarter of China’s GDP.

“The growth slowdown has hit levels policymakers can no longer ignore and we expect to see incremental loosening across three pillars – monetary, fiscal and regulatory,” BlackRock Investment Institute analysts said in a note Monday.

Earlier this year, Beijing was more focused on addressing social issues, such as high child-raising costs in a country with a rapidly aging population. A regulatory crackdown over the summer included an abrupt order that after-school tutoring companies must drastically cut their operating hours.

Sun Guofeng, head of the monetary policy department at the People’s Bank of China, emphasized to reporters last Friday how the central bank’s monetary policy remained…