Policy room ample to support recovery

China is expected to maintain an accommodative monetary stance to support economic recovery, despite the fact that monetary tightening in the United States has not yet come to an end, experts said on Wednesday.

Though higher-than-expected U.S. inflation data indicates that the U.S. Federal Reserve is poised to further raise interest rates, China's mild domestic inflation and the growing appeal of renminbi-denominated assets will give it ample room to maneuver toward a solid rebound, they said.

Robin Xing, Morgan Stanley's chief China economist, said the country's monetary policy is expected to stay relatively accommodative throughout this year to ensure a steady economic recovery from COVID-19, without a sharp tightening of policy stance.

Inflation is unlikely to constrain China's monetary policy, Xing said, as the country is expected to shun huge infrastructure stimulus that would risk pushing up commodity prices, while the country's abundant labor force means that reviving consumption of services will not add too much inflationary pressure.

"The rebound of China's economy is likely to cool global inflation instead of pushing it up," Xing said, adding that normalized production activity in China can help global supply chains function more effectively.

Growth in China's consumer price index, a key indicator of inflation, remained mild at 2.1 percent year-on-year in January.

By contrast, the U.S. reported on Tuesday CPI growth of 6.4 percent year-on-year for the same period, down from 6.5 percent in December but higher than the market expectation of 6.2 percent, according to Reuters.

Experts said the slower-than-expected ease in U.S. inflation indicates that the Fed might further raise interest rates by 50 basis points this year to a range of between 5 and 5.25 percent, which could broaden the U.S.-China interest rate differential in the short term.

However, the Fed's tightening will not stop the People's Bank of China, the country's central bank, from rendering more support to the real economy, with room remaining for reducing interest rates, said Zhou Maohua, a macroeconomic analyst at China Everbright Bank.

As China's economy steadily recovers, renminbi-denominated assets have become increasingly appealing to global investors, which can help offset the pressure of capital outflow caused by the U.S.-China interest rate differential, Zhou said.

Data from the State Administration of Foreign Exchange showed on Wednesday that foreign investors bought a net $27.7 billion worth of onshore stocks in January, marking the highest single-month reading on record.

Tang Yao, an associate professor of applied economics at Peking University's Guanghua School of Management, said that January's higher-than-expected U.S. inflation should have a limited impact on China, as the Fed is likely to stick to its announced path of interest rate hikes.

"As it is unlikely for the Fed to sharply change its rate hike path, China's monetary policy and renminbi exchange rate will not be significantly affected," Tang said.

Pointing to the policy stance of keeping monetary condition accommodative, the PBOC injected a net 199 billion yuan ($29 billion) in liquidity via its medium-term lending facility operation on Wednesday, marking the third consecutive month of net injection.

The central bank will further strengthen financial support for domestic demand and industrial systems and has vowed to expand the use of an instrument to support private companies' bond financing, the PBOC said on Wednesday following a meeting on Friday.

Xing at Morgan Stanley said China's monetary support is expected to feature structural aids to key areas such as the manufacturing sector and green development, and room remains for reducing interest rates of outstanding mortgages to stabilize the property market.

He added that the country may set a target of around 3 percent for consumer inflation in 2023.