Data Suggests China May Ease Monetary Policy

U.S., European economies at root of fall of PMI to lowest level since 2009

New data suggest that the Chinese government will be able to use quantitative easing to help sputs its economy.

China saw its official purchasing managers' index drop to 50.4 in October from 51.2 in September, against expectations that it would gain ground instead. Beijing's National Bureau of Statistics said the fall was because of troubled U.S. and European economies. The index came in at its lowest level since February of 2009.

A private sector PMI, on the other hand, according to a Reuters report, rose from September's 49.9 to an October level of 51.0, the first time that index has topped 50, the demarcation line between expansion and contraction, since June. The combination points toward a status quo in interest rates as China balances efforts to rein in inflation with worries that its explosive growth is finally slowing.

Tang Jianwei, an economist at Bank of Communications in Shanghai, was quoted saying, "All these signs may give Beijing good reason to adopt kind of selective easing in the monetary policy in the coming months. We expect the central bank may opt for net injection in the money market operations and may loosen some bank loan curbs in the months ahead. There is also a chance of cutting the reserve requirement ratio for banks in the fourth quarter."

The official PMI and private sector version are compiled by two different bodies: the former by the China Federation of Logistics and Purchasing for the National Bureau of Statistics, which collects more data from the country's biggest manufacturers, and the latter by Markit, the U.K.-based private-sector data specialist, in conjunction with HSBC. Markit focuses on small- and medium-size businesses, which provide approximately 75% of jobs in China. It is not unusual for the two PMIs to disagree.

Selective easing is now coming into play in China, with adjustments to its value-added taxes; on Monday, according to a Bloomberg report, the finance ministry increased the threshold for VAT payment and business taxes to lighten the load small businesses, 

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