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ING Bank expects less stimulus from China in 2020

China may not need as much fiscal or monetary stimulus as it did in 2019, as a phase-one trade deal between China and the U.S. boosts market sentiment, according to Iris Pang, ING Bank's economist for Greater China.

China will spend a maximum of 2 trillion Chinese yuan on infrastructure, funded by local government special bonds in 2020, compared to 3 trillion yuan in full year 2019, Pang told reporters during a press briefing in Hong Kong on Dec. 16.

The People's Bank of China is expected to continue to loosen monetary policy, albeit at a slower pace, she said. The PBoC will cut banks' reserve requirement ratios twice, by 50 basis points each in 2020, alongside a further cut of 5 basis points in each of the three key policy rates the seven-day reserve repo rate, the one-year medium-term lending facility rate, as well as the loan prime rates, or LPRs, said Pang.

In comparison, China has announced three reserve requirement ratio cuts so far this year, and the central bank reduced the seven-day reserve repo rate by 5 basis points to 2.50% in mid-November, the first cut in more than four years.

The latest one-year LPR dropped by 5 basis points to 4.15% in November and the five-year rate fell by the same magnitude to 4.80%. In August, China introduced reforms to its LPR mechanism, in which the central bank sets the reference point for new loans every month based on submissions by 18 domestic and foreign banks.

The trade deal between China and the U.S. announced last week "is a good sign that the two countries are moving away from escalation," she said.

The preliminary agreement between the two countries signaled potential rollback of tariff, though the specifics or the size of the rollback remain uncertain, according to Pang.

"Our house view is that the trade war is far from an end and it will not end in 2020 … [I]t remains a key uncertainty for the Chinese economy," Pang said, noting that China may still step up stimulus efforts if the trade war escalated.

As of Dec. 13, US$1 was equivalent to 6.98 Chinese yuan.